UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~March 31, 2018



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: - 001-33810

AMERICAN PUBLIC EDUCATION, INC.

(Exact name of registrant as specified in its charter)



Delaware	01-0724376
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

111 West Congress Street

Charles Town, West Virginia 25414

(Address, including zip code, of principal executive offices)

(304) 724-3700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

The total number of shares of common stock outstanding as of ~~November 3, 2017~~May 4, 2018 was ~~16,267,814.~~16,399,199.

Index

AMERICAN PUBLIC EDUCATION, INC.

FORM 10-Q

INDEX

Index

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Balance Sheets (Current Period Unaudited)

(In thousands)


	As of September 30, 2017		As of December 31, 2016		As of March 31, 2018		As of December 31, 2017
	(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Note 2)	$	166,259	$	146,351	$	186,168	$	179,205
Accounts receivable, net of allowance of $6,572 in 2017 and $8,077 in 2016	6,389		6,949
Accounts receivable, net of allowance of $6,181 in 2018 and $6,276 in 2017					7,924		7,136
Prepaid expenses	6,651		5,327		7,409		4,792
Income tax receivable	757		—
Total current assets	180,056		158,627		201,501		191,133
Property and equipment, net	92,169		97,687		90,247		92,374
Assets held for sale	—		2,100
Investments	14,716		14,611		12,280		12,481
Goodwill	33,899		33,899		33,899		33,899
Other assets, net	9,061		8,696		8,304		9,151
Total assets	$	329,901	$	315,620	$	346,231	$	339,038

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,041	$	6,853	$	4,952	$	8,844
Accrued liabilities	13,613		14,124		15,744		13,423
Deferred revenue	21,994		20,639		21,957		19,374
Income tax payable	—		559		2,668		1,710
Total current liabilities	40,648		42,175		45,321		43,351
Deferred income taxes	9,231		8,775		7,131		6,281
Total liabilities	49,879		50,950		52,452		49,632

Commitments and contingencies (Note 11)
Commitments and contingencies (Note 10)

Stockholders’ equity:
Preferred stock, $.01 par value; Authorized shares - 10,000; no shares issued or outstanding	—		—		—		—
Common stock, $.01 par value; Authorized shares - 100,000; 16,249 issued and outstanding in 2017; 16,109 issued and outstanding in 2016	162		161
Common stock, $.01 par value; Authorized shares - 100,000; 16,399 issued and outstanding in 2018; 16,268 issued and outstanding in 2017					164		163
Additional paid-in capital	179,708		177,061		180,735		180,674
Retained earnings	100,152		87,448		112,880		108,569
Total stockholders’ equity	280,022		264,670		293,779		289,406
Total liabilities and stockholders’ equity	$	329,901	$	315,620	$	346,231	$	339,038

The accompanying notes are an integral part of these Consolidated Financial Statements.

Index

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016			2017		2016		2018			2017
	(Unaudited)					(Unaudited)				(Unaudited)
Revenue	$	73,279	$	73,803		$	221,163	$	234,514	$	74,967		$	75,688
Costs and expenses:
Instructional costs and services	28,723		28,357			87,513		86,968		29,686			28,956
Selling and promotional	14,640		13,139			44,083		44,592		15,581			15,435
General and administrative	17,237		17,125			51,625		50,703		18,888			17,756
Loss on disposals of long-lived assets	390		5,145			1,558		5,870		128			490
Impairment of goodwill	—		4,735			—		4,735
Depreciation and amortization	4,690		4,910			14,160		14,624		4,522			4,744
Total costs and expenses	65,680		73,411			198,939		207,492		68,805			67,381
Income from operations before interest income and income taxes	7,599		392			22,224		27,022		6,162			8,307
Interest income	17		37			43		111		493			11
Income before income taxes	7,616		429			22,267		27,133		6,655			8,318
Income tax expense	3,294		85			9,668		10,524		1,865			3,849
Equity investment income (loss)	44		(18		)	105		653
Equity investment (loss) income										(201		)	40
Net income	$	4,366	$	326		$	12,704	$	17,262	$	4,589		$	4,509

Net Income per common share:
Basic	$	0.27	$	0.02		$	0.78	$	1.07	$	0.28		$	0.28
Diluted	$	0.27	$	0.02		$	0.78	$	1.07	$	0.28		$	0.28
Weighted average number of common shares:
Basic	16,248,623		16,074,701			16,225,869		16,057,710		16,359,792			16,190,061
Diluted	16,375,512		16,233,229			16,351,563		16,174,723		16,534,053			16,320,858

The accompanying notes are an integral part of these Consolidated Financial Statements.

Index

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2018			2017
	(Unaudited)						(Unaudited)
Operating activities
Net income	$	12,704		$	17,262		$	4,589		$	4,509
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	14,160			14,624			4,522			4,744
Stock-based compensation	4,262			3,972			1,843			1,246
Equity investment income	(105		)	(653		)
Equity investment loss (income)							201			(40		)
Deferred income taxes	456			(1,505		)	850			2,588
Loss on disposals of long-lived assets	1,558			5,870			128			490
Impairment of goodwill	—			4,735
Other	312			10			38			20
Changes in operating assets and liabilities:
Accounts receivable, net of allowance for bad debt	560			2,039			(788		)	749
Prepaid expenses and other assets	(1,445		)	677			(2,380		)	(2,196		)
Income tax receivable	(757		)	(1,182		)	—			(4,233		)
Accounts payable	(1,812		)	(617		)	(3,892		)	(2,016		)
Accrued liabilities	(1,430		)	(1,492		)	1,870			(2,783		)
Income taxes payable	(559		)	(682		)	958			(559		)
Deferred revenue	1,355			(370		)	2,305			2,535
Net cash provided by operating activities	29,259			42,688			10,244			5,054
Investing activities
Capital expenditures	(6,535		)	(9,670		)	(1,427		)	(1,670		)
Capitalized program development costs and other assets	(3,005		)	(1,464		)	(239		)	(627		)
Proceeds from sale of real property	1,493			—
Equity investment	—			(950		)
Dividend received from equity investment	—			2,957
Net cash used in investing activities	(8,047		)	(9,127		)	(1,666		)	(2,297		)
Financing activities
Cash paid for repurchase of common stock	(1,404		)	(630		)	(1,615		)	(1,402		)
Cash received from issuance of common stock	100			28			—			98
Excess tax benefit from stock-based compensation	—			(1,002		)
Net cash used in financing activities	(1,304		)	(1,604		)	(1,615		)	(1,304		)
Net increase in cash and cash equivalents	19,908			31,957			6,963			1,453
Cash and cash equivalents at beginning of period	146,351			105,734			179,205			146,351
Cash and cash equivalents at end of period	166,259			137,691			$	186,168		$	147,804

Supplemental disclosure of cash flow information
Income taxes paid	10,528			14,894			$	—		$	6,052

The accompanying notes are an integral part of these Consolidated Financial Statements

Index

AMERICAN PUBLIC EDUCATION, INC.

Notes to Consolidated Financial Statements

Note 1. Nature of the Business

American Public Education, Inc., or APEI, which together with its subsidiaries is referred to as the “Company,” is a provider of online and campus-based postsecondary education to approximately ~~86,500~~84,700 students through ~~the operations of~~ two subsidiary institutions:

American Public University System, Inc., or APUS, provides online postsecondary education directed primarily at the needs of the military, military-affiliated, and public ~~safety~~service communities through American Military University, or AMU, and American Public University, or APU. APUS is regionally accredited by the Higher Learning Commission.

National Education Seminars, Inc., which is referred to herein as Hondros College of Nursing, or HCN, provides nursing education to students at five campuses in ~~the State of~~ Ohio, as well as online, to serve the needs of the nursing and healthcare communities. HCN is nationally accredited by the Accrediting Council of Independent Colleges and Schools, or ACICS, and the RN-to-BSN Program is accredited by the Commission on Collegiate Nursing Education. In June 2016, HCN was notified that its Diploma in Practical Nursing and Associates Degree in Nursing Programs have been granted pre-accreditation candidacy status by the National League for Nursing Commission for Nursing Education Accreditation.

The Company’s institutions are licensed or otherwise authorized, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs by state authorities to the extent the institutions believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.

The Company’s operations are organized into two reportable segments:

American Public Education Segment, or APEI Segment. This segment reflects the operational activities at APUS, other corporate activities, and minority investments.

Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN.

Note 2. Summary of Significant Accounting Policies

Basis of ~~presentation~~Presentation and ~~accounting~~Accounting

The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. ~~Certain prior year amounts have been reclassified for comparative purposes to conform with the current presentation.~~

Principles of ~~consolidation~~Consolidation

The accompanying unaudited interim Consolidated Financial Statements include accounts of APEI and its ~~wholly-owned~~wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Unaudited Interim Financial Information

The unaudited interim Consolidated Financial Statements do not include all of the information and notes required by GAAP for ~~complete~~audited annual financial statement presentations. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company’s consolidated results of operations, financial position, and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2018. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and accompanying notes in its audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, or the Annual Report.

Index

Use of Estimates

The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts in these unaudited interim Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.

Restricted Cash

Cash and cash equivalents includes funds held for students for unbilled educational services that were received from Title IV programs. As a trustee of these Title IV program funds, the Company is required to maintain and restrict these funds pursuant to the terms of each subsidiary institution’s program participation agreement with ED. Restricted cash on the Company’s Consolidated Balance Sheets was approximately ~~$2.2~~$2.0 million at ~~September 30, 2017~~March 31, 2018 and ~~$1.6~~$2.3 million at December 31, ~~2016.~~2017. Changes in restricted cash that represent funds held for students as described above are included in cash flows from operating activities on the Company’s Consolidated Statements of Cash Flows because these restricted funds are related to a core activity of its operations.

Revenue

The Company adopted Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition.

The Company applied ASC 606 using the modified retrospective approach. The cumulative effect of initially applying ASC 606 was recognized as an adjustment to retained earnings at January 1, 2018. Prior periods have not been adjusted, and therefore comparative information continues to be reported under Topic 605, Revenue Recognition. The adoption of ASC 606 had the following impacts on the Company’s Consolidated Balance Sheet (unaudited):



	Balance at December 31, 2017		Adjustments from adoption of ASC 606			Balance at January 1, 2018
	(In thousands)
Consolidated Balance Sheet
Deferred revenue	$	19,374	$	379		$	19,753
Deferred income taxes	6,281		(101		)	6,180
Retained earnings	108,569		(278		)	108,291

In accordance with the new revenue standard’s requirements, the impact of adoption on the Company’s Consolidated Balance Sheet at March 31, 2018 and its Consolidated Statement of Income of the three months ended March 31, 2018 were as follows (unaudited):



	As of March 31, 2018
	As Reported		Adjustment			Balance without adoption
Consolidated Balance Sheet	(In thousands)
Liabilities
Deferred revenue	$	21,957	$	(423	)	$	22,380
Deferred income taxes	7,131		113			7,244
Equity
Retained earnings	112,880		310			113,190

Index



	Three Months Ended March 31, 2018
	As Reported		Adjustment			Balance without adoption
Consolidated Statement of Income	(In thousands)
Revenue	$	74,967	$	(44	)	$	75,011
Income tax expense	1,865		12			1,877

Recent Accounting Pronouncements

In January 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity and to recognize the changes in fair value within net income. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption was not permitted. The Company adopted this standard effective January 1, 2018. The Company accounts for its investment in RallyPoint Networks, Inc., or RallyPoint, in accordance with ASU 2016-01 and ASC 321, Investments - Equity Securities. For each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. During the three months ended March 31, 2018, the Company determined that impairment indicators existed and utilized an independent valuation firm to assess the fair value of the investment. The interim assessment concluded that the fair value of its investment was less than the carrying amount resulting in a non-cash pre-tax impairment charge of $0.5 million. This impairment charge is included in equity investment loss in the interim Consolidated Statements of Income.

The Company considers the applicability and impact of all ~~Accounting Standards Updates, or~~ ASUs issued by the ~~Financial Accounting Standards Board, or~~ FASB. ASUs issued ~~but not listed below,~~subsequent to the filing of the Annual Report on February 27, 2018 were assessed and determined to be either ~~not applicable~~inapplicable or expected to have minimal impact on the Company’s consolidated financial position and/or results of operations.

Note 3. Revenue

~~In May 2014,~~On January 1, 2018, the ~~FASB issued ASU No. 2014-09,~~Company adopted ASC 606, Revenue from Contracts with Customers, ~~(Topic 606). The standard is a comprehensive model~~using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to ~~use~~be reported in accordance with previous accounting ~~for revenue arising from contracts with customers and supersedes the revenue recognition requirements in FASB Accounting Standards Codification, or~~under ASC 605, Revenue Recognition, as well as other various sections of the ASC. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The authoritative guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. More judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard also includes a cohesive set of disclosure requirements including comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 was initially intended to be effective for fiscal years, and the interim periods within these fiscal years, beginning on or after December 15, 2016. In August, 2015, the FASB issued ASU 2015-14, ~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~. This update defers for one year the effective date of ASU 2014-09. The deferral will result in this standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting periods within those reporting periods. Entities must use either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach.

The ~~FASB has issued three ASUs in addition to ASU 2015-14 that amend certain aspects~~following is a description of ~~ASU 2014-09.~~principal activities from which the Company generates its revenue.

~~ASU No. 2016-08,~~ Instructional services~~Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), issued in March 2016, clarifies certain aspects~~. Instructional services revenue includes tuition, technology, and laboratory fees. The Company generally recognizes revenue as instructional services are provided over the period or term, which is, for APUS, either an eight- or sixteen-week period, and for HCN, a quarterly term. Tuition is charged by course or term, technology fees are charged to APUS students on a per course basis, and laboratory fees are charged to HCN students on a per term basis, when applicable. Generally, instructional services are billed when a course or term begins, and paid within thirty days of the ~~principal versus agent guidance.~~bill date.

Graduation fees. APUS graduation fee revenue represents a one-time, non-refundable $100 fee per degree, charged to students upon submission of a program graduation application. The fee covers administrative costs associated with completing a review of the student’s academic and financial standing prior to graduation. The Company recognizes revenue once graduation review services are completed. Generally, graduation fees are billed and paid when the student submits the graduation application.

~~ASU No. 2016-10,~~ Textbook and other course material fees~~Identifying Performance Obligations~~. Textbook and ~~Licensing, issued in April 2016, clarifies guidance~~other course materials revenue represent fees related to ~~identifying performance obligations~~the sale of textbooks and ~~licensing implementation.~~other course materials to HCN students. Revenue is recognized at the beginning of the term when the textbooks and other course materials fees are billed. Payment is generally received within thirty days of the bill date. Sales tax collected from students on the sale of textbooks and other course materials is excluded from revenue.

~~ASU No. 2016-12,~~ Other fees~~Revenue from Contracts with Customers - Narrow Scope Improvements~~. Other fees revenue represent one-time, non-refundable fees such as: application, enrollment, transcript, and ~~Practical Expedients, issued in May 2016, provides amendments and practical expedients in~~other miscellaneous fees. Generally other fees revenue is recognized when the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09.

~~The Company~~fee is continuing to evaluate the impact the new revenue recognition standard will have on its Consolidated Financial Statements by analyzing each revenue stream including the recommended five-step evaluation process, comparing historical accounting policies and practicescharged to the ~~new standard, and by carrying out a management-approved implementation plan. The Company expects~~student which coincides with the specific obligation to ~~adopt~~ the ~~provisions of this standard in the first quarter of 2018 using the modified retrospective approach.~~student.

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes~~. The standard requires that deferred tax assets and deferred tax liabilities be classified as non-current on the balance sheet rather than being separated into current and non-current. This standard was effective for fiscal years, and interim

Index

~~periods within those years, beginning~~Disaggregation of Revenue

In the following table, revenue, shown net of grants and scholarships, is disaggregated by type of service provided. The table also includes a reconciliation of the disaggregated revenue with the reportable segments (unaudited).



	Three Months Ended March 31, 2018
	(In thousands)
	APEI		HCN		Consolidated
Instructional services, net of grants and scholarships	$	65,206	$	8,061	$	73,267
Graduation fees	276		—		276
Textbook and other course materials	—		1,122		1,122
Other fees	186		116		302
Total Revenue	$	65,668	$	9,299	$	74,967

APUS provides a tuition grant to support students who are U.S. Military active-duty service members, National Guard, reservists, military spouses and dependents, and veterans as well as a grant to cover the technology fee for students using DoD tuition assistance programs. APUS and HCN also provide scholarships to certain students to assist them financially with their educational goals.

The statement of retained earnings at January 1, 2018 was adjusted by $278,000 to reflect the after ~~December 15, 2016. The guidance permitted either retrospective or prospective application.~~ tax impact related to the adoption of ASC 606, related to the recognition of graduation fees revenue at APUS. There were no adjustments to any other revenue type as a result of the adoption of ASC 606.

Contract Balances and Performance Obligations

The Company ~~adopted this ASU effective January 1, 2017 and it was applied retrospectively. As a result, the $5.1 million current~~has no contract assets or deferred ~~tax asset~~contract costs as of March 31, 2018 and December 31, ~~2016~~2017.

The Company recognizes a contract liability, or deferred revenue, when a student begins an online course, in the case of APUS, or starts a term, in the case of HCN, and revenue is recognized as described earlier in this footnote. Deferred revenue at March 31, 2018 was ~~reclassified against~~$22.0 million and includes $13.0 million in future revenue that has not yet been earned for courses and terms that are in progress as well as $9.0 million in advanced consideration received for future courses or terms, or student deposits, and represents the ~~$13.9 million non-current deferred tax liability~~Company’s performance obligation to transfer future instructional services to students. The Company’s remaining performance obligations represent the transaction price allocated to future reporting periods.

The Company has elected, as a practical expedient, to not disclose the value of unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less.

When the Company begins providing the performance obligation, a contract receivable is created, resulting in accounts receivable on the Company’s Consolidated Balance ~~Sheets~~Sheets. The Company accounts for receivables in ~~these Consolidated Financial Statements.~~

accordance with ASC 310,~~In March 2016,~~ Receivables. The Company uses the ~~FASB issued ASU No. 2016-09,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements~~portfolio approach, a practical expedient, to ~~Employee Share-Based Payment Accounting, which changes how entities account for certain aspects of share-based payments~~evaluate if a contract exists and to employees. This guidance requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement, and could introduce volatility to the Company’s provision for income taxes. Excess tax benefits must be presented as an operating activity on the statement of cash flows rather than a financing activity. ASU 2016-09 requires companies to make an accounting policy electionassess collectability at the time of ~~adoption~~contract inception based on historical experience. Contracts are subsequently reviewed for collectability if significant events or circumstances indicate a change.

The allowance for doubtful accounts is based on management’s evaluation of the status of existing accounts receivable. Among other factors, management considers the age of the receivable, the anticipated source of payment and the historical allowance considerations. Consideration is also given to ~~either estimate~~any specific known risk areas among the existing accounts receivable balances. Recoveries of receivables previously written off are recorded when received. The Company does not charge interest on past due receivables.

Refund Policies

The Company provides a stated period of time during which students may withdraw from a class, for APUS, or a term, for HCN, without further financial obligation resulting in a refund liability. The refund policy for each company is as follows:

American Public University System

Index

APUS’s tuition revenue varies from period to period based on the number of ~~awards that are expected~~net course registrations and the volume of undergraduate versus graduate registrations. Students may remit tuition payments through the online registration process at any time or they may elect various payment options, including payments by sponsors, alternative loans, financial aid, or the DoD tuition assistance program which remits payments directly to ~~vest (consistent with existing GAAP)~~APUS. If one of the various other payment options is confirmed as secured, the student is allowed to start the course. These other payment options can delay the receipt of payment up until the course starts or longer, resulting in the recording of an account ~~for forfeitures when they occur. The forfeiture election provision must be applied using a retrospective transition approach, with a cumulative-effect adjustment recorded to retained earnings as of~~receivable at the beginning of ~~the period of adoption. The new guidance is effective~~each session. Tuition revenue for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2016-09 effective January 1, 2017 and elected to apply the cash flow guidance prospectively; therefore, prior periodssessions in progress that have not been ~~adjusted.~~earned by APUS is presented as deferred revenue in the accompanying Consolidated Balance Sheets.

APUS refunds 100% of tuition for courses that are dropped before the conclusion of the first seven days of a course. The Company ~~also elected~~does not recognize revenue for dropped courses. After a course begins, APUS uses the following refund policy:



	8-Week Course- Tuition Refund Schedule

	Withdrawal Date		Tuition Refund Percentage
	Before or During Week 1		100%
	During Week 2		75%
	During Weeks 3 and 4		50%
	During Weeks 5 through 8		No Refund

	16-Week Course- Tuition Refund Schedule

	Withdrawal Date		Tuition Refund Percentage
	Before or During Week 1		100%
	During Week 2		100%
	During Weeks 3 and 4		75%
	During Weeks 5 through 8		50%
	During Weeks 9 through 16		No Refund

Students affiliated with certain organizations may have an alternate refund policy.

If a student withdraws during the academic term, APUS calculates the portion of instructional services and other fees that are non-refundable based on the tuition refund policy and recognizes it as revenue in the period the withdrawal occurs.

Hondros College of Nursing.

HCN’s tuition revenue varies from period to ~~continue to estimate~~period based on the number of awards that are expected to vest using the forfeiture option. The adoption of ASU 2016-09 increased the Company’s income tax expense by approximately $0.5 million for the three months ended March 31, 2017. There was no impact in the three months ended June 30, 2017students enrolled and the ~~three months ended September 30, 2017. The company anticipates an increase in reported income tax expense between $0.6 million~~programs they are enrolled in. Students may remit tuition payments at any time, or they may elect various payment options that can delay receipt of payment up until the term starts or longer. These other payment options include payments by sponsors, financial aid, alternative loans, or payment plan options. If a payment option is confirmed, the student is allowed to start the term. Generally, financial aid is awarded prior to the start of the term and ~~$0.9 million~~requests for authorization of disbursement begin in the first ~~quarter~~week of ~~2018~~the term. Tuition revenue for the term in progress that has not yet been earned by HCN is presented as deferred revenue in the accompanying Consolidated Balance Sheets.

HCN’s refund policy complies with the rules of the Ohio State Board of Career Colleges and Schools and is applicable to each term. For a course with an on-campus or other in-person component, the date of withdrawal is determined by a student’s last attended day of clinical offering, laboratory session, or lecture. For an online course, the date of withdrawal is determined by a student’s last submitted assignment in the course. HCN uses the following refund policy:

Index



	Quarterly Term

	Withdrawal Date		Tuition Refund Percentage
	Before first full calendar week of the quarter		100%
	During first full calendar week of the quarter		75%
	During second full calendar week of the quarter		50%
	During third full calendar week of the quarter		25%
	During fourth full week of the quarter		No Refund

Students affiliated with certain organizations may have an alternate refund policy.

If a student withdraws during the term, HCN calculates the portion of tuition that is non-refundable based on the tuition refund policy and recognizes it as revenue in the period the withdrawal occurs.

Refund Liability

APUS uses the portfolio approach and applies the expected value method to determine if a refund liability exists. This requires management judgment and the use of estimates and historical data to assess the likelihood and magnitude of a revenue reversal due to ~~expiring stock options with an exercise price greater than~~a refund liability. Due to the ~~current stock~~short- duration of the courses, and the refund policy described above, any uncertainty regarding a student’s withdrawal is resolved in a short time period. Based on measurement and analysis, the Company determined that a significant reversal in the cumulative amount of revenue recognized is not expected. The Company includes this estimate in the transaction price. ~~Other increases~~There are approximately $15,000 of refund liabilities for APUS included in ~~income tax expense may occur throughout~~deferred revenue. APUS updates the ~~year for~~measurement of the ~~vesting of restricted stock, determined by the stock price~~refund liability at the end of each reporting ~~period.~~

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill~~period for changes in expectations, and ~~Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates step two from the goodwill impairment test. Instead,~~ if the ~~carrying amount of a reporting unit exceeds its fair value, an impairment loss should be recognized in an amount equal~~reversal becomes significant would recognize the corresponding adjustments to the excess, but limited to the total amount of goodwill allocated to the reporting unit. The guidance must be applied on a prospective basis and disclosure of the nature of and reason for the change in accounting principle is required upon transition. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company intends to early adopt ASU 2017-04 with its 2017 annual goodwill impairment test and currently anticipates that the implementation of this standard will not have a material impact on its Consolidated Financial Statements.revenue.

~~In May 2017,~~Because each HCN term coincides with the ~~FASB issued ASU No. 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718): Scope~~Company’s fiscal quarter period, there is no refund liability as of ~~Modification Accounting~~, which provides guidance about which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The guidance should be applied prospectively to an award modified on or after the adoption date. The Company does not plan to early adopt, will apply the guidance prospectively, and currently anticipates that the implementation of this standard will not have a material impact on its Consolidated Financial Statements.March 31, 2018.

~~There have been no other applicable material pronouncements issued since the filing of the Company’s Annual Report.~~

Note 3.4. Property and Equipment

All property and equipment is recorded at cost less accumulated depreciation and amortization, except the acquired assets of HCN, which were recorded at fair value at the acquisition date. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. Different depreciation and amortization methods are used for tax purposes. Maintenance and repairs are expensed as incurred, while other costs are capitalized if they extend the useful life of the asset.

The Company’s Partnership At a Distance^TM system, or PAD, is a customized student information and services system used by APUS to manage admissions, online orientation, course registrations, tuition payments, grade reporting, progress toward degrees, and various other functions. Costs associated with this system have been capitalized in accordance with FASB ASC Subtopic 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and classified as property and equipment. These costs are amortized over the estimated useful life of five years. The company also capitalizes certain costs for academic program development. These costs are transferred to property and equipment upon completion of each program and amortized over an estimated life not to exceed three years.

~~Index~~

The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. Losses incurred on long-lived assets are reported as loss on disposals of long-lived assets in these unaudited interim Consolidated Financial Statements.

Note ~~4. Assets Held for Sale~~

Assets held for sale at December 31, 2016 represented excess real property located in Charles Town, West Virginia for the APEI Segment, which was no longer in use due to the relocation of employees to a new facility. Long-lived assets are classified as held for sale when the assets are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria. As such, the property was recorded at the lower of the carrying value or fair value, less cost to sell, until the asset was sold.

During the three months ended September 30, 2016, the Company recognized a loss of $0.5 million when the asset was classified as held for sale and the net book value was adjusted to fair value. In May 2017, the APEI Segment sold the asset held for sale with a fair value of $2.1 million for a net sales price of $1.5 million. During the nine months ended September 30, 2017, the Company recognized a loss of $0.6 million when the asset was sold, which is included in loss on long-lived assets in these Consolidated Financial Statements.

~~Note~~ 5. Investments

~~In February 2013,~~On December 21, 2015, the Company made a ~~$4.0~~$3.5 million investment in preferred stock of ~~Fidelis Education, Inc., or Fidelis Education,~~RallyPoint, an online social network for members of the military, representing approximately ~~22%~~12% of its fully diluted equity. On ~~February 1, 2016,~~October 24, 2017, the Company made an additional $950,000 investment in preferred stock of Fidelis Education, increasing its investment in Fidelis Education to approximately 23% of its fully diluted equity. Fidelis Education offers a learning relationship management platform that has the goal of improving education advising and career mentoring services offered to students as they pursue college degrees. In connection with the investment, the Company is entitled to certain rights, including the right to representation on the Board of Directors of Fidelis Education. The Company accounts for its investments in Fidelis Education under the equity method of accounting. Therefore, the Company recorded the investments at cost and recognizes its share of earnings or losses in Fidelis Education in the periods for which they are reported with a corresponding adjustment in the carrying amount of the investment.

~~On September 30, 2012, the Company made a $6.8~~$0.3 million investment in preferred stock of ~~NWHW Holdings, Inc., or NWHW Holdings, a holding company that operates an information technology training company, New Horizons Worldwide, Inc., which represents approximately 20% of~~Rally Point. Subsequent to the additional investment, the Company’s fully diluted ~~equity of NWHW Holdings. During the three months ended September 30, 2016,~~ownership was unchanged and the Company ~~received a dividend of $3.0 million from NWHW Holdings.~~continues to be entitled to two board observer seats. The Company accounts for its investment in ~~NWHW Holdings using the equity method of accounting, and therefore recorded a corresponding reduction~~RallyPoint in ~~the carrying amount of its investment.~~

~~Note 6. Goodwill and Intangible Assets~~

~~In connection~~accordance with ~~its November 1, 2013 acquisition of HCN,~~ASC 321, Investments - Equity Securities. At each reporting period the Company ~~applied FASB ASC 805,~~ ~~Business Combinations~~, using the acquisition method of accounting. The Company recorded $38.6 million of goodwill, representing the excess of the purchase price over the amount assigned to the net assets acquired and the fair value assigned to identified intangible assets, and recorded $8.1 million of identified intangible assets.

In August 2016, the Company completed an interim goodwill assessment and recorded a $4.7 million impairment. Subsequently, the Company completed its annual goodwill assessment and determined that the fair value exceeded the carrying value. In connection with the preparation of these unaudited interim Consolidated Financial Statements, the Company completedcompletes a qualitative assessment ~~of goodwill that included a review of all the events and circumstances listed in FASB ASC 350,~~ ~~Intangibles - Goodwill and Other, in addition~~considering impairment indicators to other entity-specific factors. For example, the Company considered the increase in HCN student enrollment and revenue for the three months ended September 30, 2017 as compared to the same period in 2016. The Company also considered that the competitive marketplace in the HCN industry did not change and that the capital markets for education companies increased in recent periods. Lastly, the Company considered the quantitative analysis performed at the last annual goodwill assessment that determined that the fair value exceeded the carrying value. After review of events and circumstances it was concluded that goodwill was not impaired as of September 30, 2017.

Index

evaluate whether the investment is impaired. During the three months ended March 31, 2018, the Company determined that impairment indicators existed and utilized an independent valuation firm to assess the fair value of the investment. The interim assessment concluded that the fair value of its investment was less than the carrying amount resulting in a non-cash pre-tax impairment charge of $0.5 million. This impairment charge is included in equity investment loss in the interim Consolidated Statements of Income.

Determining the fair value of our investments is judgmental in nature and requires the use of significant estimates and assumptions from management, including with respect to revenue growth rates, operating margins, and future economic market conditions, among others. Additionally, the valuation firm’s analysis includes significant assumptions about discount rates and valuation multiples. There can be no assurance that the estimates and assumptions made for purposes of our investment impairment testing will prove to be accurate predictions of the future. If our assumptions are not realized, we may record additional impairments in future periods. It is not possible at this time to determine if any such impairment charge would result or, if it does, whether such charge would be material.

Note 7.6. Net Income Per Common Share

Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share increases the shares used in the per share calculation by the dilutive effects of options and restricted stock awards. Stock options are not included in the computation of diluted earnings per share when their effect is anti-dilutive. There were ~~124,999 and 129,583~~no anti-dilutive stock options excluded from the calculation for the three ~~and~~ ~~nine~~months ended ~~September 30, 2017, respectively, compared to 246,074 and 248,674~~March 31, 2018. There were 134,747 anti-dilutive stock options excluded from the calculation for the three ~~and~~ ~~nine~~months ended ~~September 30, 2016~~March 31, 2017~~, respectively.~~.

Note 8.7. Income Taxes

The Company determines its interim tax provision by applying the estimated income tax rate expected for the full calendar year to income before income taxes for the period adjusted for discrete items.

The Company is subject to U.S. Federal income taxes as well as income taxes of multiple state jurisdictions. For Federal and state tax purposes, the tax years from ~~2013~~2014 to ~~2016~~2017 remain open to examination.

The Company recognized tax expense for the three months ended ~~September 30,~~March 31, 2018 and March 31, 2017 ~~and September 30, 2016~~ of ~~$3.3~~$1.9 million and ~~$0.1~~$3.8 million, respectively, or effective tax rates of ~~43.0%~~28.9% and 20.7%, respectively. For the nine months ended September 30, 2017 and September 30, 2016, the Company recognized tax expense of $9.7 million and $10.5 million, respectively, or effective tax rates of and 43.2% and 37.9%46.1%, respectively. The effective tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 reflects the reduction in the federal corporate tax rate to 21% from the prior existing maximum rate of 35% effective January 1, 2018 under the U.S. Tax Cuts and Jobs Act, or the Tax Act. The effective tax rate for the three months ended March 31, 2018 includes approximately $0.2 million in additional income tax expense due to ASU 2016-09, Compensation - Stock Compensation (Topic 718).The effective tax rate for the three months ended March 31, 2017 includes approximately $0.5 million in additional income tax expense due to ~~the implementation of~~ ASU ~~2016-09,~~ ~~Compensation - Stock Compensation (Topic 718).~~ Under ASU 2016-09, excess tax benefits and tax deficiencies associated with stock based compensation must be recognized in the income statement and in operating activities on the statements of cash flows. Previously, the excess tax benefits and tax deficiencies were recorded in additional paid-in capital under stockholders’ equity on the balance sheet and under financing activities on the statements of cash flows. Because expiring stock options with an exercise price greater than the current stock price expired during the three months ended March 31, 2017, the reversal of the tax benefit that was reported when the stock options were issued is now recorded in the income statement.2016-09.

Note 9.8. Stock-Based Compensation

On March 31, 2017 the Company’s Board of Directors adopted the American Public Education, Inc. 2017 Omnibus Incentive Plan, or the 2017 Incentive Plan, and on May 12, 2017, or the Effective Date, the Company’s stockholders approved the 2017 Incentive Plan, at which time the 2017 Incentive Plan became effective. Upon effectiveness of the 2017 Incentive Plan, the Company ceased making awards under the American Public Education, Inc. 2011 Omnibus Incentive Plan, or the 2011 Incentive Plan. The 2017 Incentive Plan allows the Company to grant up to 1,675,000 shares, as well as shares of the Company’s common stock that were available for issuance under the ~~American Public Education, Inc.~~ 2011 Incentive Plan as of the Effective Date. In addition, the number of shares of common stock available under the 2017 Incentive Plan will be increased from time to time by the number of shares subject to outstanding awards granted under the 2011 Incentive Plan ~~the American Public Education, Inc. 2007 Omnibus Incentive Plan and the American Public Education, Inc. 2002 Stock Incentive Plan~~ that terminate by expiration or forfeiture, cancellation or otherwise without issuance of such shares following the Effective Date. Prior to 2012, the Company issued a mix of stock options and restricted stock, but since 2011 the Company has not issued any stock options. The 2017 Incentive Plan includes a provision that allows individuals who have reached certain service and retirement eligibility criteria on the date of grant an accelerated service period of one year. The Company recognizes compensation expense for these individuals over the accelerated period.

Restricted Stock and Restricted Stock Unit Awards

Index

Stock-based compensation expense related to restricted stock and restricted stock unit grants is expensed over the vesting period using the straight-line method for Company employees and the graded-vesting method for members of the Board of Directors, and is measured using the Company’s stock price on the date of grant. The Company estimates forfeitures of share-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from original estimates. The table below summarizes the restricted stock and restricted stock unit awards activity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 (unaudited):

~~Index~~


	Number of Shares		Weighted-Average Grant Price and Fair Value		Number of Shares		Weighted-Average Grant Price and Fair Value
Non-vested, December 31, 2016	437,971		$	21.54
Non-vested, December 31, 2017					461,262		$	20.91
Shares granted	278,934		$	23.36	274,723		$	25.60
Vested shares	(184,670	)	$	25.88	(191,280	)	$	20.95
Shares forfeited	(31,450	)	$	21.07	(9,254	)	$	23.04
Non-vested, September 30, 2017	500,785		$	21.24
Non-vested, March 31, 2018					535,451		$	23.23

Option Awards

The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model. Prior to 2012, the Company calculated the expected term of stock option awards using the “simplified method” in accordance with Securities and Exchange Commission Staff Accounting Bulletins No. 107 and 110 because the Company lacked historical data and was unable to make reasonable assumptions regarding the future. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of peers with similar attributes. In addition, the Company determines the risk-free interest rate by selecting the U.S. Treasury five-year constant maturity, quoted on an investment basis in effect at the time of grant for that business day. Estimates of fair value are subjective and are not intended to predict actual future events, and subsequent events are not necessarily indicative of the reasonableness of the original estimates of fair value made under FASB ASC 718,.Stock Compensation. Options previously granted ~~vest~~vested ratably over periods of three to five years and ~~expire~~expired seven to ten years from the date of grant. All of the Company’s remaining outstanding stock options expired during the three months ended March 31, 2018. Option activity is summarized as follows (unaudited):


	Number of Options		Weighted Average Exercise Price		Weighted-Average Contractual Life (Years)	Aggregate Intrinsic Value (In thousands)		Number of Options		Weighted Average Exercise Price		Weighted-Average Contractual Life (Years)	Aggregate Intrinsic Value (In thousands)
Outstanding, December 31, 2016	259,969		$	34.68	0.53	246
Outstanding, December 31, 2017								109,616		$	37.52	0.01	—
Options granted	—		$	—				—		$	—
Awards exercised	(14,002	)	$	6.99				—		$	—
Awards forfeited	(132,351	)	$	35.17				(109,616	)	$	37.52
Outstanding, September 30, 2017	113,616		$	37.52	0.26	$	—
Outstanding, March 31, 2018								—		$	—		$	—

Exercisable, September 30, 2017	113,616		$	37.52	0.26	$	—
Exercisable, March 31, 2018								—		$	—		$	—

Index

Stock-Based Compensation Expense

Stock-based compensation expense charged against income during the three ~~and~~ ~~nine~~months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ is as follows (unaudited):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(In thousands)												(In thousands)
Instructional costs and services	$	229		$	274		$	958		$	1,077		$	377		$	312
Selling and promotional	200			168			559			524			240			175
General and administrative	1,137			813			2,745			2,371			1,226			759
Stock-based compensation expense in operating income	1,566			1,255			4,262			3,972			1,843			1,246
Tax benefit	(620		)	(504		)	(1,688		)	(1,566		)	(490		)	(494		)
Stock-based compensation expense, net of tax	$	946		$	751		$	2,574		$	2,406		$	1,353		$	752

~~Index~~

As of ~~September 30, 2017,~~March 31, 2018, there was ~~$6.9~~$11.1 million of total unrecognized compensation cost, representing unrecognized compensation cost associated with non-vested restricted stock and restricted stock units. The total remaining cost is expected to be recognized over a weighted average period of ~~1.9~~2.3 years.

Note ~~10.~~9. Segment Information

The Company has two operating segments that are managed in the following reportable segments:

•American Public Education Segment, or APEI Segment; and

•Hondros College of Nursing Segment, or HCN Segment.

In accordance with FASB ASC 280, Segment Reporting, the chief operating decision-maker has been identified as the Company’s Chief Executive Officer. The Company’s Chief Executive Officer reviews operating results to make decisions about allocating resources and assessing performance for the APEI Segment and HCN Segment.

Index

A summary of financial information by reportable segment is as follows (unaudited):

Three Months Ended
September 30, Nine Months Ended
September 30,

2017 2016 2017
2016
(In thousands)
Revenue:
   American Public Education Segment $ 64,885
$ 67,065
$ 197,318
$ 212,859
   Hondros College of Nursing Segment 8,394
6,738
23,845
21,655
Total Revenue $ 73,279
$ 73,803
$ 221,163
$ 234,514
Depreciation and amortization:
   American Public Education Segment $ 4,335
$ 4,550
$ 13,117
$ 13,619
   Hondros College of Nursing Segment 355
360
1,043
1,005
Total Depreciation and amortization $ 4,690
$ 4,910
$ 14,160
$ 14,624
Income from operations before interest income and income taxes:
   American Public Education Segment $ 6,855
$ 5,659
$ 20,445
$ 31,211
   Hondros College of Nursing Segment 744
(5,267 ) 1,779
(4,189 )
Total Income from operations before interest income and income taxes $ 7,599
$ 392
$ 22,224
$ 27,022
Interest income, net:
   American Public Education Segment $ 17
$ 37
$ 43
$ 111
   Hondros College of Nursing Segment —
—
—
—
Total Interest income, net $ 17
$ 37
$ 43
$ 111
Income tax expense:
   American Public Education Segment $ 3,007
$ 2,100
$ 8,975
$ 12,111
   Hondros College of Nursing Segment 287
(2,015 ) 693
(1,587 )
Total Income tax expense $ 3,294
$ 85
$ 9,668
$ 10,524
Capital expenditures:
   American Public Education Segment $ 2,645
$ 2,694
$ 6,187
$ 8,992
   Hondros College of Nursing Segment 109
72
348
678
Total Capital expenditures $ 2,754
$ 2,766
$ 6,535
$ 9,670

~~Index~~



	Three Months Ended March 31,
	2018		2017
	(In thousands)
Revenue:
American Public Education Segment	$	65,668	$	68,129
Hondros College of Nursing Segment	9,299		7,559
Total Revenue	$	74,967	$	75,688
Depreciation and amortization:
American Public Education Segment	$	4,168	$	4,406
Hondros College of Nursing Segment	354		338
Total Depreciation and amortization	$	4,522	$	4,744
Income from operations before interest income and income taxes:
American Public Education Segment	$	5,130	$	7,927
Hondros College of Nursing Segment	1,032		380
Total Income from operations before interest income and income taxes	$	6,162	$	8,307
Interest income, net:
American Public Education Segment	$	485	$	11
Hondros College of Nursing Segment	8		—
Total Interest income, net	$	493	$	11
Income tax expense:
American Public Education Segment	$	1,621	$	3,689
Hondros College of Nursing Segment	244		160
Total Income tax expense	$	1,865	$	3,849
Capital expenditures:
American Public Education Segment	$	1,394	$	1,566
Hondros College of Nursing Segment	33		104
Total Capital expenditures	$	1,427	$	1,670

A summary of the Company’s consolidated assets by reportable segment is as follows (current period unaudited):


	As of September 30, 2017		As of December 31, 2016		As of March 31, 2018		As of December 31, 2017
	(In thousands)				(In thousands)
Assets:
American Public Education Segment	$	280,431	$	267,260	$	294,315	$	287,656
Hondros College of Nursing Segment	49,470		48,360		51,916		51,382
Total Assets	$	329,901	$	315,620	$	346,231	$	339,038

Note ~~11.~~10. Commitments and Contingencies

The Company accrues for costs associated with contingencies including, but not limited to, regulatory compliance and legal matters when such costs are probable and can be reasonably estimated. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management’s estimate of such costs, which may vary from the ultimate costs and expenses, associated with any such contingency.

From time to time the Company may be involved in legal matters in the normal course of its business.

Index

On August 3, 2017, the Company received from the Attorney General of the Commonwealth of Massachusetts a Civil Investigative Demand, or CID, dated July 31, 2017, relating to an investigation of alleged unfair or deceptive acts or practices by AMU in connection with the recruitment and retention of students and the financing of education. The CID requires the production of documents and information relating to recruitment, enrollment, job placement and other matters. The Company continues to cooperate with the Attorney General’s office and cannot predict the eventual scope, duration or outcome of the investigation at this time, including whether any potential loss, or range of potential losses, is probable or reasonably estimable.

In connection with APUS’s Title IV compliance audit for the year ended December 31, 2016, ED indicated that APUS must post an irrevocable letter of credit of approximately $700,000. APUS posted the letter of credit on March 28, 2018.

Note ~~12.~~11. Concentration

APUS students utilize various payment sources and programs to finance their educational expenses, including funds from: Department of Defense, or DoD, tuition assistance programs; federal student aid from Title IV programs; and education benefit programs administered by the U.S. Department of Veterans Affairs, or VA education benefits; as well as cash and other sources. Reductions in or changes to DoD tuition assistance, Title IV programs, VA education benefits, and other payment sources could have a significant impact on the Company’s business, operations, financial condition and cash flows. As of March 31, 2018 approximately 54% of APUS students self-reported that they served in the military on active duty at the time of initial enrollment. Active duty military students generally take fewer courses per year on average than non-military students.

A summary of APEI Segment revenue derived from APUS students by primary funding source for the three ~~and~~ ~~nine~~months ended ~~September 30,~~March 31, 2018 and March 31, 2017 ~~and September 30, 2016~~ is included in the table below (unaudited).


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2017	2016	2017	2016	2018	2017
DoD tuition assistance programs	36.3%	35.3%	36.5%	35.8%	37%	37%
Title IV programs	27.4%	29.5%	26.9%	29.2%	26%	27%
VA education benefits	22.8%	22.3%	22.7%	22.1%	24%	22%
Cash and other sources	13.5%	12.9%	13.9%	12.9%	13%	14%

~~HCN students also utilize various payment sources and programs to finance their educational expenses, including Title IV programs and VA education benefits. For the~~ ~~nine~~ ~~months ended September 30, 2017 and 2016, approximately 83.5% and 84.4%, respectively,~~A summary of HCN Segment revenue ~~was~~ derived from ~~Title IV programs.~~students by primary funding source for the three months ended March 31, 2018 and March 31, 2017 is included in the table below (unaudited).



	Three Months Ended March 31,
	2018		2017
Title IV programs	82	%	84	%
Cash and other sources	15	%	14	%
VA education benefits	3	%	2	%
	100	%	100	%

~~Note 13. Subsequent Event~~

Index

On December 1, 2015, the Company made a $3.5 million investment in preferred stock of RallyPoint, an online social network for members of the military. The Company’s investment represented approximately 14% of RallyPoint’s fully diluted equity and entitled APEI to two board observer seats. On October 24, 2017, the Company made an additional $300,000 investment in preferred stock of RallyPoint. Subsequent to the additional investment, the Company’s fully diluted ownership was unchanged and the Company continues to be entitled to two board observer seats.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this ~~report~~Quarterly Report on Form 10-Q and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2017, or ~~the~~our Annual Report.

Forward-Looking Statements

Some of the statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend such forward-looking statements, including statements regarding our operations, performance and financial condition, strategic initiatives, and the regulatory and competitive environments affecting our business, to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission, or the SEC. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition and results of operations may vary materially from those expressed in our forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this section of this Quarterly Report on Form 10-Q, in the “Risk Factors” section of this Quarterly Report on Form 10-Q, in the “Risk Factors” section of ~~the~~our Annual Report, and in our various filings with the SEC. You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q in combination with the more detailed description of our business in ~~the~~our Annual Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

Background

We are a provider of online and on-campus postsecondary education to approximately ~~86,500~~84,700 students through two subsidiary institutions. Our subsidiary institutions offer programs designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities that may advance students in their current professions or help them prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.

Our ~~wholly-owned~~wholly owned operating subsidiary institutions include the following:

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American Public University System, Inc., or APUS, provides online postsecondary education directed primarily at the needs of the military, military-affiliated, and public ~~safety~~service communities. APUS is an online university system, which includes: American Military University, or AMU, which is focused on educating military students, and American Public University, or APU, which is focused on educating non-military students.

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APUS has approximately ~~84,700~~82,700 students and offers ~~108~~109 degree programs and ~~107~~109 certificate programs in diverse fields of study including business administration, health science, technology, criminal justice, education and liberal arts, as well as national security, military studies, intelligence, and homeland security. APUS is regionally accredited by the Higher Learning Commission, or HLC.

In December 2016, APUS submitted a change in structure application to HLC in connection with ~~the previously disclosed organizational realignment of APUS, HLC requested that APUS submit an application to enable HLC to determine whether~~ APUS’s ~~proposal~~plan to enter into a ~~shared-services~~shared services model with ~~APEI constitutes a change in organization or structure that requires~~APEI. In November 2017, HLC ~~prior approval. On December 22, 2016,~~invited APUS ~~submitted~~to submit updates to the ~~requested change-of-structure application.~~application to address new HLC ~~is currently reviewing APUS’s~~guidelines for review of shared services arrangements. The HLC Board of Trustees was tentatively scheduled to consider the application ~~and as part of the review process conducted an on-site visit to APUS in early May 2017. On~~at its June 2018 meeting, but on April 26, ~~2017,~~2018, HLC notified APUS that consideration of the application would be postponed until HLC’s November 2018 meeting. On February 7, 2018, HLC ~~has delayed completing and issuing~~imposed a ~~report of its on-site visit because HLC staff believes that HLC’s Criteria for Accreditation and related policies do not provide an explicit frame of reference for how~~“governmental investigation” designation on APUS in connection with the ~~Criteria for Accreditation should be applied to a shared-services model between an accredited institution and a related entity. On July 7, 2017, HLC~~Civil Investigative Demand described below, but notified APUS that ~~at its June 29, 2017 meeting~~it will continue to review APUS’s change in structure application while the governmental investigation designation remains active. HLC ~~Board of Trustees authorized~~may, however, defer action on the ~~commencement of a process to develop a framework for applying~~application while the ~~Criteria of Accreditation to such shared-services models through HLC’s Change of Control, Structure or Organization process.~~investigation is pending. HLC has indicated that ~~a group of HLC Board of Trustees members and HLC staff~~it will ~~present a proposed framework~~review findings related to the ~~full HLC Board of Trustees for its consideration at its November 2017 meeting. HLC indicated that APUS~~designation, if any, when they occur and will ~~have an opportunity to update its application after a framework is approved, and HLC staff will issue its report after reviewing any~~determine whether such ~~updates. We believe that the earliest that the HLC Board of Trustees would make a determination on~~findings impact the change ofin structure application ~~is February 2018.~~at that time. HLC ~~had~~previously planned to visit APUS in February 2017 as part of a standard ~~mid-cycle review. However, as a result of the change-of-structure application process, HLC postponed~~comprehensive evaluation, but agreed to postpone that ~~mid-cycle review~~comprehensive evaluation until the third quarter of ~~2018.~~2018 in light of the change in structure application process. We are unable to predict whether HLC will approve APUS’s application and whether or not such approval will be subject to limitations or ~~conditions.~~conditions, including as related to the governmental investigation designation. Further, we are unable to predict what changes, if any, HLC may require to APUS’s organizational realignment and how such changes may impact our business, operations, financial condition, results of operations, and cash flows. The next comprehensive evaluation for reaffirmation of accreditation is scheduled for the 2020-2021 academic year.

In September 2016, ED began a program review of APUS’s administration of the Title IV programs during the 2014-2015 and 2015-2016 award years. The program review remains open and ongoing. At this time, we cannot predict the outcome of the program review, when it will be completed, or whether ED will place any liability or other limitations on APUS as a result of the review.

In April 2017, APUS continued to strengthen its verification process by implementing new procedures for prospective non-military students, an effort that originated in April 2015 with the implementation of a requirement for prospective students to complete a free, noncredit admissions assessment. APUS has made multiple changes to the assessment process since its original implementation and may further modify it in the future in order to better identify college-ready students. For example, in July 2017, APUS implemented a process requiring enhanced verification of prospective non-military students’ prior transcripts. Even if our admissions process initiatives are successful in achieving the desired result of identifying and enrolling students that are likely to succeed and improving the student experience, they could result in adverse impacts on APUS enrollments. These initiatives require significant time, energy and resources, and if our efforts are not successful, they may adversely impact our results of operations, cash flows, and financial condition. Even if these initiatives successfully lead to the identification and enrollment of students who are likely to succeed and improving student experience, they could result in adverse impacts on APUS enrollments.

In July 2017, APUS began accepting applications for two applied doctoral programs in Strategic Intelligence and Global ~~Security with the~~Security. The first cohorts ~~scheduled to begin~~began in January 2018. The programs meet the need for higher-level education and research combined with professional practice in these fields. ~~We expect to incur start-up expenses ranging from approximately $0.4 million to $0.6 million during the remainder of 2017.~~ We cannot predict whether APUS’s new programs will be successful or how they will impact our results of operations, cash flows, or financial condition.

In July 2017, the Council on Education for Public Health, or CEPH, notified APUS that the CEPH Board of Councilors acted in June 2017 to accredit the Master of Public Health program for a five-year term, extending until July 1, 2022.

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On August 3, 2017, we received from the Attorney General ~~of the Commonwealth~~ of Massachusetts a Civil Investigative Demand, or CID, dated July 31, 2017, relating to an investigation of alleged unfair or deceptive acts or practices by AMU in connection with the recruitment and retention of students and the financing of education. The CID requires the production of documents and information relating to recruitment, enrollment, job placement and other matters. We ~~are cooperating~~continue to cooperate with the Attorney General’s office and cannot predict the eventual scope, duration or outcome of the investigation at this ~~time.~~time, including whether any potential loss, or range of potential losses, is probable or reasonably estimable. Furthermore, we cannot predict what affect, if any, the CID will have on our financial position or results of operations.

~~In September 2017, Dr. Karan H. Powell announced that she would retire from her role as President of APUS on October 15, 2017. Dr. Wallace E. Boston was appointed Interim President of APUS until~~On January 29, 2018, ED issued a ~~permanent replacement is appointed. We incurred approximately $1.3 million~~Final Audit Determination letter in ~~costs~~connection with APUS’s Title IV compliance audit for the year ended December 31, 2016, which identified a finding related to return of Title IV funds calculations that were not properly computed. In the ~~retirement~~letter, ED conveyed its finding that Title IV funds had not been returned timely for a sufficient percentage of ~~Dr. Powell~~students. Under ED regulations, if the institution’s annual Title IV compliance audit for either of its two most recently completed fiscal years finds that Title IV funds were not

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returned timely for 5% or more of students sampled in the ~~period ending September 30, 2017.~~audit, the institution generally must submit an irrevocable letter of credit. ED also noted that a similar finding had been made in an open program review with respect to which the Company has not yet received a program review report. In connection with the finding, ED indicated that the Company must post an irrevocable letter of credit equal to 25% of the total amount of Title IV program funds that should have been returned during calendar year 2016, which results in a requirement for a letter of credit of approximately $700,000. On February 15, 2018, the Company requested that ED reconsider its finding that the Company had made untimely returns. On March 27, 2018, ED responded confirming the requirement for a letter of credit, and on March 28, 2018, the Company posted the required letter of credit.

On February 7, 2018, HLC notified APUS that it is imposing a “governmental investigation” designation on APUS in connection with the CID. The designation is expected to remain in place until the office of the Attorney General of Massachusetts concludes its investigation, at which time HLC will review the circumstances of the situation and determine what further action HLC will take, if any. In imposing the designation, HLC reaches no conclusions about the merits of the investigation or its possible outcome. Imposition of the designation is accompanied by monitoring and a notice on HLC’s website that APUS is currently under governmental investigation. APUS must submit an interim report no later than June 4, 2018 providing an update regarding the status of the investigation. We cannot predict what actions HLC will take with respect to the designation, including whether it will have an effect on APUS’s pending change in structure application.

APUS ~~is in the process of adopting~~implemented new general education requirements ~~and anticipates the implementation of the new requirements in~~during the first quarter of 2018. These new requirements ~~will change~~changed the courses that are required of all students. APUS incurred approximately $400,000 in costs related to the implementation of the new general education requirements in the first quarter of 2018 related to faculty realignment. While we believe the changes in the general education requirements are beneficial for our students and will result in a better and more positive educational experience, we cannot predict what effect, if any, these new requirements will have on the total number of registrations, student persistence, or our financial position or results of operations.

We regularly evaluate and review our costs and expenses. As part of that effort, in the first quarter of 2018 APUS initiated a voluntary reduction in force program for employees with more than eight years of service. The program resulted in a reduction of 48 employees, representing approximately 5% of APUS’s non-faculty workforce. APUS recorded expenses for termination benefits related to the workforce reduction in the first quarter of 2018 in accordance with FASB ASC 420, Exit or Disposal Cost Obligations. The Company incurred an aggregate of approximately $1.7 million of pre-tax expenses associated with employee severance benefits. APUS expects the reduction in force to result in pre-tax labor and benefits costs savings in 2018 to be in the range of approximately $1.7 million to $2.1 million, and in the range of approximately $2.1 million to $2.8 million on an annualized basis. These cost savings do not include expenses associated with employee severance benefits. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material. There is no certainty that the voluntary program, or any other expense reduction initiative, will have the intended benefits of reducing costs and expenses over the long-term, or whether there will be adverse impacts, including because of the loss of valuable employees.

In January 2017, DoD announced that its Third Party Education Assessment will take the form of a new Voluntary Education Institutional Compliance Program, or ICP, which replaces the former process, the Military Voluntary Education Review. The ICP is an iterative process with three stages. APUS was notified on May 8, 2017 that it was included in the first set of 250 institutions selected to participate in the ICP. On May 29, 2017, APUS submitted a self-assessment as part of the first stage of the ICP. On February 9, 2018, DoD issued an Iteration 1 Report for APUS that made two findings. With respect to recruiting, marketing, and advertising, DoD found some instances where attire worn by an individual providing testimonials on the institution’s public-facing website could be construed as similar to a distinctive part of military uniform. With respect to financial matters, DoD found a lack of information relating to the financial aid process, including the lack of a timeline for applying for financial aid. APUS was required develop a corrective action plan to address each of the findings within 30 days after receipt of the Iteration 1 Report and must resolve the findings and provide information to DoD about corrective actions taken within six months after receipt of the Iteration 1 Report. If the resolution cannot be completed within six months, APUS must submit a status report every three months until the finding is resolved. APUS submitted a corrective action plan to DoD on March 15, 2018. An educational institution that demonstrates an unwillingness to resolve a finding may be subject to a range of penalties from a written warning to revocation of the Memorandum of Understanding, or MOU, and termination of the institution’s participation in the DoD tuition assistance programs. If we are no longer able to receive funds from DoD tuition assistance programs, or if those programs are reduced, eliminated, or temporarily suspended, our enrollments and revenue could be significantly reduced, which would result in a material adverse effect on our results of operations and financial condition.

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For more information on the potential risks associated with the above APUS initiatives, APUS more generally, and applicable accreditation matters, please refer to our Annual Report.

National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN, provides nursing education to approximately ~~1,800~~2,040 students at five campuses in ~~the State of~~ Ohio, as well as online. HCN offers a Diploma in Practical Nursing, or PN Program, and an Associate Degree in Nursing, or ADN Program. The campuses are located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo. HCN also offers an online Registered Nurse to Bachelor of Science in Nursing completion program, ~~which we refer to as the~~or RN-to-BSN Program, predominately to students in Ohio.

~~We acquired~~ HCN on November 1, 2013. In January 2016, we received a letter from ED approving the change in ownership and control of HCN and granting HCN provisional certification to participate in Title IV programs until December 31, 2018. HCN received a fully executed Provisional Program Participation Agreement, or PPPA, in February 2016. While provisionally certified, HCN operates under the PPPA, which requires HCN to apply for and receive approval from the Secretary of Education before initiating any substantial changes, such as establishing an additional location at which at least 50% of an eligible program will be offered and Title IV program funds will be disbursed, offering academic programs at higher than the bachelor’s degree level, or adding a new education program. In June 2016, ED approved HCN’s application to open a new campus in suburban Toledo, Ohio. HCN had previously obtained required approvals fromis nationally accredited by the Accrediting Council of Independent Colleges and Schools, or ~~ACICS, the State~~ACICS. As a result of ~~Ohio Board of Nursing, or OBN, and the Ohio State Board of Career Colleges and Schools, or Ohio State Board. The~~opening its new Toledo campus ~~began operations~~ in January ~~2017.~~2017, HCN ~~incurred expenses~~applied to have the campus included in its accreditation with HCN. Acting on that application, ACICS included the Toledo campus in HCN’s accreditation through April 30, 2018 and conducted a site visit to the Toledo campus on January 31 - February 1, 2018. Subsequent to that site visit, HCN issued a number of findings related to a Campus Effectiveness Plan and a faculty development plan for the Toledo campus, and on May 8, 2018, ACICS notified HCN that the Toledo campus’s inclusion in HCN’s accreditation was extended until September 10, 2018, that HCN is required to submit additional materials in connection with the Toledo campus by the end of June 2018 and that HCN is on a compliance warning. If ACICS finds that the Toledo campus has failed to come into compliance with ACICS’s accreditation criteria related to the ~~start-up~~findings within a time frame established by ACICS, absent a finding of good cause for failure to do so, ACICS may take adverse action. Additional information on accreditation and risks of accreditation, including the ~~new campus. We cannot predict whether HCN’s new campus will~~loss of accreditation, can be ~~successful or how it will impact~~found in our ~~results of operations, cash flows, or financial condition.~~Annual Report.

~~Each of HCN’s campuses is nationally accredited by ACICS.~~ By decision dated December 12, 2016, the Secretary of ED withdrew and terminated ED’s recognition of ACICS. On March 23, 2018, the United States District Court for the District of Columbia issued a Memorandum Opinion that remanded the December 2016 decision to the Secretary of ED for further proceedings. On April 4, 2018, the Secretary of ED issued a letter explaining that as a result of the remand, there is currently no final decision on the recognition petition that ACICS submitted to ED in January 2016, and accordingly ACICS’s status as ~~discussed more fully~~a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in ~~“Regulatory and Legislative Activity” below in this Quarterly Report and in our Annual Report.~~that status until the Secretary of ED issues a final decision on ACICS’s recognition petition. We cannot predict what action the Secretary will take on ACICS’s recognition petition.

ACICS requires accredited institutions to submit annually certain campus-level and program-level data (e.g., retention rates, placement rates, and licensure exam pass rates) for purposes of monitoring student achievement against established requirements, including minimum “standards” and expected “benchmarks.” To satisfy ACICS’s standards, the retention rate, placement rate, and licensure exam pass rate each must exceed 60%. To satisfy ACICS benchmarks, each rate must exceed 70%. If ACICS determines that an institution’s campus-level or program-level data do not satisfy one or more standards or benchmarks, ACICS may take certain actions. In January 2017, ACICS published a new policy, effective December 6, 2016, that defines in terms of metric ranges when a particular action will be taken at the campus and program levels, including placement on reporting status, issuance of a compliance warning, issuance of a show-cause directive, or issuance of an adverse action. In May 2017, ACICS published

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~~proposed changes to its Accreditation Criteria to clarify certain aspects of the new policy. ACICS accepted the proposed changes as final effective August 4, 2017.~~

For the reporting year July 1, 2015 through June 30, 2016, several HCN campuses and programs did not satisfy ACICS student achievement measures. As a result, HCN received notices from ACICS, particularly with respect to the PN Program at the Cleveland campus, which received a program-level Show-Cause Directive related to its placement rate that was later vacated; the Cleveland campus, which received a campus-level Compliance Warning related to its placement rates; the ADN Program at the Cleveland campus, which received a program-level Compliance Warning related to its placement rate; and the Cleveland and Dayton campuses, which were placed on campus-level Reporting status related to their retention rates. In response to some of these actions by ACICS, HCN was required to develop Improvement Plans. In addition, in connection with the campus-level Compliance Warning for the Cleveland campus, HCN submitted required information to ACICS. For more information related to these actions from ACICS and the required responses from HCN, see our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017.

HCN has an in-process application for accreditation by Accrediting Bureau of Health Education Schools, or ABHES, ~~a national accreditor for allied health schools~~an accrediting agency that is recognized by ~~ED for federal student financial aid purposes.~~ED. On February 6, 2018, ABHES policies require that institutions and programs applying for ABHES accreditation must advise ABHES immediately of any adverse or potentially adverse action, including a Show-Cause Directive, by another accrediting agency. HCN timely notified ABHES of the ACICS Show-Cause Directive for the PN Program at the Cleveland campus, of HCN’s response, and when the Show-Cause Directive was vacated.ABHES also reserves the right not to grant initial accreditation if an institution is on probation or an equivalent status imposed by another accrediting agency. At this time, we cannot predict how ABHES will respond to ACICS’s actions described above, including how they will impact any decision with respect to initial accreditation of HCN or any of HCN’~~s programs or campuses as part of that initial accreditation decision.~~

In August 2017, the Ohio State Board notified HCN of a formal disciplinary action against HCN’s Cincinnati campus because the campus discontinued offering one version of the PN Program curriculum allegedly without the Ohio State Board’s permission and implemented a new PN Program curriculum. It was alleged that at least three students enrolled in the discontinued curriculum were unable to complete the PN Program without incurring substantial costs and time to transfer into and complete the program with the new curriculum. On August 10, 2017, HCN requested a hearing before the Ohio State Board with respect to the notification and HCN is cooperating with the Ohio State Board on resolution of the matter. If the Ohio State Board finds that HCN violated the Ohio State Board’s requirements, it could limit, suspend, revoke or refuse to issue or renew a certificate of registration or program authorization or impose a civil penalty of not more than $3,500 for each violation.

~~The Ohio Board of Nursing conducted a routine site visit regarding the HCN PN Program from July 24 to July 25, 2017. On August 9, 2017 the OBN~~ notified HCN that ~~it did not make any adverse findings as a result~~at its January 2018 meeting, ABHES acted to defer action on HCN’s application for initial accreditation until ABHES’s May 2018 meeting. On March 30, 2018, HCN submitted to ABHES additional information in connection with ABHES’s consideration of ~~the visit.~~HCN’s application.

To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing education program that is approved by the Ohio Board of Nursing, or the OBN. Regulations of the OBN, which approve the Diploma in Practical Nursing, or the PN Program, and the Associate Degree in Nursing, or the ADN Program, require that nursing education programs such as HCN’s PN and ADN Programs have a pass rate on the relevant National Council Licensure Examination, or NCLEX, that is at least 95% of the national average for first-time candidates in a calendar year. If a program does not attain ~~such~~this pass rate, the program may face various consequences. On March 8, 2017, the OBN placed HCN’s ADN Program on provisional approval because the ADN Program has not met the OBN pass rate standard for ~~four~~five consecutive ~~years. We believe the ADN program pass rate has been negatively affected by the pass rates at HCN’s Cleveland campus over the last several~~ years. The OBN will consider restoring a program to Full Approval status after a program is placed on provisional status due to low NCLEX scores if the program attains a pass rate that meets or exceeds 95% of the national average for first-time candidates for at least two consecutive years. If a program on provisional approval ~~continues to fail~~fails to meet and maintain the requirements of the OBN at the end of the time period established for provisional approval, the OBN may propose to continue provisional approval for a set time period or may propose to withdraw ~~its~~ approval ~~of the program~~ pursuant to an adjudication proceeding. On March 8, 2018, the OBN released a final report of the ADN Program’s performance for calendar year 2017, which found that HCN’s ADN Program did not meet the OBN pass rate standard in 2017. HCN has been implementing changes, including the curriculum changes discussed in our Annual Report, that are designed to ~~help increase~~improve NCLEX scores over time but there is no assurance that these changes will be successful. Similarly, the actions HCN is taking to improve its student achievement measures may not be successful in resolving existing issues or may fail to prevent additional issues from arising with respect to other campuses or programs. Any consequences that result from failure to meet testing standards or student achievement measures mayThis situation could have an adverse impact on our ability to enroll students and eventually our ability to continue HCN’s ADN Program, any of which would have an adverse effect on our results of operations, cash flows, and financial condition.

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For more information on the potential risks associated with these HCN initiatives and HCN more generally, please refer to our Annual Report.

To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain levels. Pursuant to requirements of the Higher Education Opportunity Act enacted in 2008, which amended the Higher Education Act, if the cohort default rate for any year exceeds 40%, an institution loses eligibility to participate in Title IV programs, and if the institution’s cohort default rate exceeds 30% for three consecutive years, the institution loses eligibility to participate in Title IV programs. If an institution’s cohort default rate is equal to or greater than 30% in any year it must establish a default prevention task force. In September 2017, ED released final official cohort default rates for institutions for federal fiscal year 2014, with ED reporting a 23.6% cohort default rate for APUS and an 11.4% cohort default rate for HCN. Additional information regarding student loan default rates, prior year default rates, and potential risks associated with them is available in our Annual Report.

Regulatory and Legislative Activity

As more fully explained in our Annual Report, service members of the United States Armed Forces are eligible to receive tuition assistance from their branch of service through the Uniform Tuition Assistance Program of the Department of Defense, or DoD tuition assistance programs. Service members may use the DoD tuition assistance programs to pursue postsecondary degrees at institutions that are accredited by accrediting agencies recognized by the Secretary of Education. Each institution participating in the DoD tuition assistance programs is required by a DoD rule to sign a DoD-developed standard Memorandum of Understanding, or MOU, outlining certain commitments and agreements between the institution and DoD prior to being permitted to participate in the DoD tuition assistance programs. Both APUS and HCN have signed the MOU. APUS is approved and HCN is currently awaiting DoD’s approval to participate in the DoD tuition assistance programs. We do not anticipate that participation in the DoD tuition assistance programs will have a material impact on HCN’s enrollments or revenue.

By signing the MOU, APUS agreed to, among other things, participate in DoD’s Third Party Education Assessment. In January 2017, DoD announced that its Third Party Education Assessment will take the form of a new Voluntary Education Institutional Compliance Program, or ICP, which will replace the former process, the Military Voluntary Education Review. The ICP will utilize a sampling approach to review regularly the 2,700 educational institutions that participate in the DoD tuition assistance programs. Each year, DoD will select randomly 200 institutions and use a risk-based model to select 50 additional institutions. The risk-based model will take into account several data elements, including: rate of course completion; total verified complaints; changes in enrollment of students receiving tuition assistance; ratio of graduation rate relative to cost per course; changes in graduation rate; and total number of enrollment transactions processed. The ICP will be an iterative process with three stages. After each stage, DoD will narrow the list of institutions subject to heightened review in the following stage. DoD will share the findings from each stage with other government agencies and regulators. An institution that is selected and has no issues will be exempt from random selection for three years and from risk-based selection for one year. By signing the MOU, APUS also agreed to participate in the ICP when requested. APUS was notified on May 8, 2017 that it is included in the first set of 250 institutions selected to participate in the ICP. On May 29, 2017, APUS submitted a self-assessment as part of the first stage of the ICP, and has not received a response. ~~Within six months after receipt of any~~ assessment report findings, institutions must resolve the findings and provide information to DoD regarding corrective actions taken. In instances when the resolution cannot be completed within six months, the institution must submit a status report every three months until the finding is resolved. An educational institution that demonstrates an unwillingness to resolve a finding may be subject to penalties ranging from a written warning to revocation of the MOU and termination of the institution’s participation in the DoD tuition assistance programs.

In early May 2017, the Coast Guard announced that the funding limit for active duty Coast Guard members using DoD tuition assistance for fiscal year 2017 was expected to be exhausted in mid to late May 2017, and that once these funds were exhausted, tuition assistance for active duty Coast Guard members would be suspended and no new tuition assistance applications would be accepted or authorized for the remainder of the fiscal year ending September 30, 2017. However, on May 19, 2017, the Coast Guard announced that additional funding for tuition assistance had been received and tuition assistance applications would continue to be processed under existing eligibility criteria. For more information related to the DoD tuition assistance programs and their potential risks, please refer to our Annual Report.

A~~s more fully explained in our Annual Report, by~~ decision dated December 12, 2016, the Secretary of ~~the U.S. Department of Education, or~~ ED withdrew and terminated ED’s recognition of ACICS. When the Secretary withdraws the recognition of an accrediting agency, a postsecondary educational institution may be allowed to continue its participation in the Title IV programs on a provisional basis for a period not to exceed 18 months from the date of the Secretary’s decision to allow

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the institution to seek accreditation from another recognized accrediting agency. ED has indicated that during the period of provisional participation it will deem an ACICS-accredited institution to hold recognized accreditation and will require the institution to comply with certain conditions and restrictions. On December 21, 2016, HCN and ED executed a revised PPPA and addendum to the PPPA in which HCN agreed to comply with ED’s conditions and requirements. HCN has an in-process application for accreditation by the Accrediting Bureau of Health Education Schools, or ABHES. ABHES is a national accreditor for allied health schools recognized by ED. As part of the accreditation application process, ABHES conducted a site visit to each HCN location in October 2017.

~~On December 15, 2016, ACICS filed a motion for a temporary restraining order and preliminary injunction against ED in~~March 23, 2018, the United States District Court for the District of ~~Columbia.~~Columbia issued a Memorandum Opinion that remanded the December 2016 decision to the Secretary of ED for further proceedings. On April 4, 2018, the Secretary of ED issued a letter explaining that as a result of the remand, there is currently no final decision on the recognition petition that ACICS ~~asked~~submitted to the ~~court to stay~~Department in January 2016. Accordingly, ACICS’s status as a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in that status until the ~~Secretary’s~~Secretary of ED issues a final decision ~~terminating~~on ACICS’s recognition status, restore ACICS’s recognition status, and enjoin ED from enforcing the requirements for ACICS-accredited institutions, including those set forth in ED’s revised PPPA. On December 20, 2016, the court denied ACICS’s request for a temporary restraining order, and on February 21, 2017, the court denied ACICS’s request for a preliminary injunction. On March 31, 2017, ACICS filed a motion for summary judgment seeking to vacate the Secretary’s decision terminating ACICS’s recognition status and requesting that the court return ACICS’s petition for continued recognition to ED for reconsideration. On April 28, 2017, ED filed a cross-motion for summary judgment. Briefing on the motions was completed on May 26, 2017, and the court may schedule a hearing to assist in its consideration of the motions. On October 4, 2017, ACICS announced that it had submitted to ED a formal petition for recognition as a national accreditor.petition. See “Overview - Background - National Education Seminars, Inc.”

As discussed more fully in our Annual Report, on November 1, 2016, ED published final regulations, which we refer to as the Borrower Defense Regulations, to, among other things, establish a new federal standard and a process for determining whether a Direct Loan borrower has a defense to repayment on a Direct Loan based on an act or omission of an institution. On January 19, 2017, ED published additional regulations to establish procedural rules governing the two-part borrower defense and recovery proceedings where ED asserts borrower defense claims on behalf of a group of borrowers. The regulations published January 19, 2017 also amend ED’s existing regulations governing the process used to assess a fine, limitation, suspension, or termination against an institution by adding procedures through which ED may seek to recover a monetary liability assessed against an institution under ED’s previous borrower defense regulations that remain in effect. The regulations published on January 19, 2017 were effective immediately.On June 16, 2017, ED published a notice in the Federal Register to announce that in light of the existence and potential consequences of pending litigation that had been brought in federal court to challenge the Borrower Defense Regulations, ED decided to postpone indefinitely the implementation of certain provisions of the Borrower Defense Regulations. Provisions postponed indefinitely include the portions of the Borrower Defense Regulations that would have (i) established a new federal standard and process for determining whether a borrower has a defense to repayment on a Direct Loan based on an act or omission of an institution, (ii) prohibited institutions that participate in the Direct Loan program from using certain contractual provisions regarding dispute resolution, such as pre-dispute arbitration agreements or class action waivers, and required certain notifications and disclosures regarding the use of arbitration, and (iii) revised ED’s financial responsibility standards and added related disclosure requirements. Certain other provisions of the Borrower Defense Regulations that are not the subject of pending litigation have not been delayed and became effective July 1, 2017. On June 16, 2017, ED announced that it ~~intends to~~would convene a negotiated rulemaking committee to develop proposed regulations to revise the Borrower Defense Regulations and to address certain other related matters. ED held two public hearings and solicited written comment from the public with respect to the agenda for the negotiated rulemaking committee, which is expected to meet for the first time in November 2017. We submitted written comments on the agenda for the negotiated rulemaking committee on July 12, 2017. On August 30, 2017, ED announced that as part of the negotiated rulemaking committee to develop proposed regulations to revise the Borrower Defense Regulations it will form a subcommittee to focus on potential modifications to ED’s financial responsibility regulations. On October 24, 2017, ED published an interim final rule in the Federal Register to delay until July 1, 2018 the effective date of the provisions of the Borrower Defense Regulations identified in the June 16, 2017 notice. ED stated that delay to a specific date, namely July 1, 2018Final Gainful Employment, or July 1 of a later year, is required in order to comply with the Higher Education Act’s master calendar requirements for rulemaking. On October 24, 2017, ED also published a notice in the Federal Register announcing ED’s intent to delay beyond July 1, 2018 to July 1, 2019 the effective date of the provisions of the Borrower Defense Regulations identified in the June 16, 2017 notice, because ED determined it would not be practicable to engage in negotiated rulemaking and publish final regulations before July 1, 2018.

Under the Higher Education Act of 1965, or HEA, as amended, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that prepare students for “gainful employment in a recognized occupation.” On October 31, 2014, ED published final regulations related to gainful employment, or the Final GE Regulations. On June 16, 2017, ED announced that it intends to convene a negotiated rulemaking committee to develop proposed regulations to revise the Final GE, Regulations. ED held two public hearings and solicited written comment from the public with respect to the agenda for the negotiated rulemaking committee, which ~~is expected to meet~~met for the first time in December 2017. We submitted written comments on the agenda for the negotiated rulemaking committee on July 12, 2017.

~~Index~~

~~Previously, on~~ The negotiated rulemaking committee held meetings in December 2017, February 2018, and March ~~7, 2017, ED announced that it would provide institutions subject to~~2018, but the ~~Final GE Regulations additional time to comply with certain aspects~~members of the Final GE Regulations. In particular, ED extended to July 1, 2017 the deadline for an institution to submit an alternative earnings appeal to the debt-to-earnings rates that were released by ED in January 2017. In addition, ED extended to July 1, 2017 the date by which an institution was required to update disclosures for each of their GE programs using the 2017 disclosure template published by ED on January 19, 2017. On June 30, 2017, ED announced that, in response to a court order, it would further extend the deadline for an institution to submit an alternative earnings appeal. On August 18, 2017, ED established October 6, 2017 as the deadline for all programs to file a notice of intent to file an alternate earnings appeal and February 1, 2018 as the deadline for all programs to submit an alternate earnings appeal. On June 30, 2017, ED also announced that it will allow institutions until July 1, 2018 to comply with certain disclosure requirements in the Final GE Regulations, including requirements to include a link to the disclosure template in promotional materials and to distribute directly a copy of the disclosure template to prospective students. The June 30, 2017 announcementcommittee did not ~~change~~reach consensus on proposed regulatory language. As a result, ED may propose regulatory language, with no obligation to use language negotiated or agreed-upon during the ~~July 1, 2017 deadline for the requirement to provide a completed disclosure template,~~committee meetings. We cannot predict what regulations will be proposed or ~~a link thereto, on GE program web pages, and the Final GE Regulations~~ultimately adopted as a ~~whole have not been delayed or altered. Accordingly, pending additional guidance or instruction from ED, APUS and HCN must continue to comply with the other requirements~~result of ~~the Final GE Regulations.~~

Executive Order 13777, “Enforcing the Regulatory Reform Agenda,” signed by the President on February 24, 2017, directs Federal agencies including ED to establish a Regulatory Reform Task Force to evaluate existing regulations and make recommendations to the agency head regarding the regulations. The first Progress Report from the ED Regulatory Reform Task Force identifies a list of over 150 ED regulations that will be reviewed by the Task Force. The Progress Report also notes that the Task Force will review 1,772 issues of policy-related guidance that are subject to the Executive Order. In connection with Executive Order 13777, on June 22, 2017, ED announced that it was seeking public input on regulations that may be appropriate for repeal, replacement, or modification. We submitted written comments on September 20, 2017.

Beginning July 1, 2017, in accordance with the Consolidated Appropriations Act, 2017, institutions that participate in the Title IV programs may award Pell Grant funds for up to 150% of a student’s standard scheduled Pell Grant in one award year. This provision, which commonly is referred to as “year-round Pell”, is intended to allow students to graduate more quickly and with less debt. To be eligible for the additional Pell Grant funds, a student must be otherwise eligible to receive Pell Grant funds and must be enrolled at least half-time in the payment period for which the student receives additional Pell Grant funds in excess of 100% of the student’s standard scheduled award.

On August 16, 2017, the President signed into law the Harry W. Colmery Veterans Educational Assistance Act of 2017, commonly known as the Forever GI Bill. The bill makes several changes to the administration of VA education benefits. Among other things, for service members who left the military after January 1, 2013, the bill removes a requirement that they use their Post-9/11 GI Bill benefits within 15 years after their last 90-day period of active-duty service. The bill also alters the way the VA calculates eligibility for VA education benefits by providing additional benefits to service members with at least 90 days but less than six months of active-duty service. Additionally, the bill will restore VA education benefits to students who were enrolled in schools that closed after January 2015 if their credits did not transfer.this rulemaking process.

We cannot predict the extent to which the aforementioned regulatory activity or any other potential regulatory or legislative activity may impact us or our institutions, nor can we predict the possible associated burdens and costs. Additional information regarding the regulatory and legislative environment and potential risks associated with it is available in our Annual Report.

Reportable Segments

Our operations are organized into two reportable segments:

American Public Education Segment, or APEI Segment. This segment reflects the operational activities of APUS, other corporate activities, and minority investments.

Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN.

Summary of Results

For the three month period ended ~~September 30, 2017,~~March 31, 2018, our consolidated revenue decreased from ~~$73.8~~$75.7 million to ~~$73.3~~$75.0 million, or by ~~0.7%~~1.0%, over the comparable prior year period. Our operating margins ~~increased~~decreased from ~~0.5%~~11.0% to ~~10.4%~~8.2% for the three month period ended ~~September 30, 2017,~~March 31, 2018, over the comparable prior year period. ~~For the~~ ~~nine~~The three month period ended ~~September 30, 2017, our consolidated revenue decreased from $234.5~~March 31, 2018 includes pre-tax expenses of approximately $1.7 million ~~to $221.2 million, or by 5.7%, over~~associated with the

~~Index~~

voluntary reduction in force program announced on March 12, 2018. The workforce reduction was substantially completed as of April 1, 2018.

~~comparable prior year period. Our operating margins decreased from 11.5% to 10.0%~~For the three months ended March 31, 2018, the Company recognized pre-tax expense as follows for the ~~nine~~ ~~month period ended September 30, 2017, over the comparable prior year period.~~voluntary reduction in force program:




	Three Months Ended March 31, 2018
Instructional costs and services	$	765
Selling and promotional	494
General and administrative	455
Total voluntary reduction in force expense	$	1,714

For the three month period ended ~~September 30, 2017,~~March 31, 2018, APEI Segment revenue decreased from ~~$67.1~~$68.1 million to ~~$64.9~~$65.7 million, or by 3.3%, over the comparable prior year period. APEI Segment operating margins increased from 8.4% to 10.6% for the three month period ended September 30, 2017, over the comparable prior year period. For the ~~ninemonth period ended September 30, 2017, APEI Segment revenue decreased from~~ ~~$212.9 million~~ to ~~$197.3 million, or by~~ ~~7.3%~~3.6%, over the comparable prior year period. APEI Segment operating margins decreased from ~~14.7%~~11.6% to ~~10.4%~~7.8% for

Index

the ~~nine~~three month period ended ~~September 30, 2017,~~March 31, 2018, over the comparable prior year period. Net course registrations at APUS ~~decreased 4.3% and 6.7%~~ for the three ~~and~~ ~~nine~~month ~~periods~~period ended ~~September 30, 2017, respectively,~~March 31, 2018 decreased from 86,800 to 83,300, or approximately 4.0%, over the comparable prior year ~~periods.~~period. Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty. During the three and nine months ended September 30, 2017, APEI Segment recorded a loss on disposal of long-lived assets of $0.4 million and $1.6 million, respectively. During the comparable prior year periods, APEI Segment recorded a loss on disposals of long-lived assets of $5.1 million and $5.9 million, respectively.

For the three month period ended ~~September 30, 2017,~~March 31, 2018, APEI Segment expenses include pre-tax expenses of approximately $1.7 million associated with the voluntary reduction in force program announced on March 12, 2018. The workforce reduction was substantially completed on April 1, 2018.

For the three month period ended March 31, 2018, HCN Segment revenue increased from ~~$6.7~~$7.6 million to ~~$8.4~~$9.3 million, or by ~~24.6%~~23.0%, over the comparable prior year period. HCN Segment operating margins increased from ~~negative 78.2%~~5.0% to ~~8.9%~~11.1% for the three month period ended ~~September 30, 2017, over the comparable prior year period. For the~~ ~~nine~~ month period ended September 30, 2017, HCN Segment revenue increased from $21.7 million to $23.8 million, or by 10.1%, over the comparable prior year period. HCN Segment operating margins increased from negative 19.3% to 7.5% for the ~~nine~~ ~~month period ended September 30, 2017,~~March 31, 2018 over the comparable prior year period. Enrollment at HCN for the three month period ended ~~September 30, 2017~~March 31, 2018 increased from ~~1,610~~1,710 to ~~1,790,~~2,040, or approximately ~~11.2%~~19.3%, over the comparable prior year ~~period, and for the~~ ~~nine~~ ~~month periods ended September 30, 2017 and September 30, 2016 enrollment was unchanged.~~period. HCN student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty. ~~During the three and nine months ended~~ ~~September 30, 2016, HCN Segment recorded a $4.7 million impairment charge on goodwill.~~

We believe these changes in revenue and operating margins are primarily due to the factors discussed below in the “Results of Operations” section of this Management’s Discussion and Analysis.

Critical Accounting Policies and Use of Estimates

For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

We provide incentive-based compensation opportunities to certain employees through cash incentive and equity awards. The expense associated with these awards is reflected within our operating expenses. For the year ending December 31, ~~2017,~~2018, our Compensation Committee approved an annual incentive arrangement generally applicable to senior management employees, with the aggregate amount of any awards payable dependent upon the achievement of certain Company financial and operational goals as well as individual performance goals. Given that the awards are generally contingent upon achieving annual objectives, determination regarding incentive awards is not expected to be made until after the results for the year ending December 31, ~~2017~~2018 are finalized. Because assessing actual performance against many of these objectives cannot generally occur until at or near year-end, determining the amount of expense that we incur in our interim financial statements for incentive-based compensation involves the judgment of management. Amounts accrued are subject to change in future interim periods if actual future financial results or operational performance are better or worse than expected. During the three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, management determined that certain financial and operational goals related to cash incentive awards would not be achieved. Therefore, the previously recorded accruals related to these awards were reduced during the period. As a result, we recognized an aggregate ~~benefit~~expense of approximately ~~$0.4 million for the three months ended September 30, 2017 and $0.9 million of expense for the~~ ~~nine~~ ~~month periods ended September 30, 2017, compared to $0.8~~$1.1 million and ~~$2.5~~$0.6 million, ~~of expense for the three and nine month periods ended September 30, 2016,~~ respectively, associated with our ~~2017~~2018 and ~~2016~~2017 incentive-based compensation plans.

In the past we have invested in, and in the future we expect to continue to invest in, improving the APUS student experiences and our business operations. These investments can result in an increased level of spending, and may cost more than expected or fail to be successful. As a result, these types of changes are not without risk to our operations and financial results. For example, unsuccessful development or improvement efforts, or replacing assets that have not been fully depreciated, could result in our having to impair long-lived assets. For example, for the year ended December 31, 2016, APUS reported a $4.0

~~Index~~

~~million cost associated with the abandonment of development of a new student course registration system. We could incur further impairments in the future.~~

~~In the first quarter of 2017, APUS launched Momentum~~^TM, a competency-based education, or CBE, program. In September 2017, the ED Office of the Inspector General, or ED OIG, issued a final audit report concluding that a non-profit university that had previously received approval from ED to offer competency-based programs for purposes of the Title IV programs, did not satisfy institutional eligibility requirements to participate in the Title IV programs due to the relative level of student enrollments in correspondence courses. ED OIG recommended that ED’s Federal Student Aid division require repayment of Title IV program funds. To the extent that the issues raised by ED OIG’s report or other developments impacting the assessment by ED of CBE programs would cause delays or prevent ED’s approval of Momentum^TM~~for participation in federal student aid programs, our investment in the program may be impaired.~~

Results of Operations

Below we have included a discussion of our operating results and material changes in our operating results during the three ~~and~~ ~~nine~~months ended ~~September 30, 2017~~March 31, 2018 compared to the three ~~and~~ ~~nine~~months ended ~~September 30, 2016.~~March 31, 2017. Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our APEI and HCN Segments. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in expenses.

The higher education industry has experienced rapid changes due to technological developments, evolving student needs, regulatory challenges, increased competition, and challenges in the military markets. We believe that these factors have contributed to a decline in ~~enrollments~~net course registrations at ~~our institutions~~APUS and have had a negative impact on our results of operations. As discussed in this Quarterly Report on Form 10-Q and in our Annual Report, we are undertaking certain strategic initiatives, including those discussed above in the “Overview” section of this Management’s Discussion and Analysis, that we believe over the long term may increase our ability to compete for new students, enroll students who are more college ready, and retain existing and future students. We cannot predict whether these initiatives will be successful over the long term and cannot guarantee that we will be able to reverse our revenue decline. Although we cannot predict what adjustments may be necessary or costs may be incurred as a result of our institutions’ decline in enrollments and revenue, any such adjustments and costs may have an adverse impact on our results of operations or financial condition.

For more information on the initiatives discussed above, our operations, and related risk factors, please refer to our Annual Report and the “Overview” section of this Management’s Discussion and Analysis.

Index

Our consolidated results for the three ~~and~~ ~~nine~~months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ reflect the operations of our APEI and HCN Segments. For a more detailed discussion of our results by reportable segment, refer to our Analysis of Operating Results by Reportable Segment.

Analysis of Consolidated Statements of Income

For the Consolidated Statements of Income, refer to our Financial Statements: Consolidated Statements of Income. The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated (unaudited):

~~Index~~


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
Revenue	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Instructional costs and services	39.2		38.4		39.6		37.1		39.6		38.3
Selling and promotional	20.0		17.8		19.9		19.0		20.8		20.4
General and administrative	23.5		23.2		23.3		21.7		25.2		23.4
Loss on disposals of long-lived assets	0.5		7.0		0.7		2.5		0.2		0.6
Impairment of goodwill	—		6.4		—		2.0
Depreciation and amortization	6.4		6.7		6.4		6.2		6.0		6.3
Total costs and expenses	89.6		99.5		89.9		88.5		91.8		89.0

Income from operations before interest income and income taxes	10.4		0.5		10.1		11.5		8.2		11.0
Interest income	—		0.1		—		—		0.7		—

Income from operations before income taxes	10.4		0.6		10.1		11.5		8.9		11.0
Income tax expense	4.5		0.1		4.4		4.5		2.5		5.1
Equity investment gain	0.1		—		—		0.3
Equity investment (loss) income									(0.3	)	0.1
Net Income	6.0	%	0.5	%	5.7	%	7.3	%	6.1	%	6.0	%

Three Months Ended ~~September 30, 2017~~March 31, 2018 Compared to Three Months Ended ~~September 30, 2016~~March 31, 2017

Revenue. Our consolidated revenue for the three months ended ~~September 30, 2017~~March 31, 2018 was ~~$73.3~~$75.0 million, a decrease of ~~$0.5~~$0.7 million, or ~~0.7%~~1.0%, compared to ~~$73.8~~$75.7 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The revenue decrease is due to a ~~$2.2~~$2.4 million, or ~~3.3%~~3.6%, revenue decrease in our APEI Segment, partially offset by a $1.7 million, or ~~24.6%~~23.0%, revenue increase in our HCN Segment. The APEI Segment revenue decrease was primarily due to a ~~4.3%~~4.0% decrease in net course registrations. The HCN Segment revenue increase was primarily due to ~~an 11.2%~~a 19.3% increase in student enrollment and an increase in revenue per student due to a change in student mix and other factors.

Costs and expenses. Costs and expenses for the three months ended ~~September 30, 2017~~March 31, 2018 were ~~$65.7~~$68.8 million, ~~a decrease~~an increase of ~~$7.7~~$1.4 million, or ~~10.5%~~2.1%, compared to ~~$73.4~~$67.4 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The ~~decrease~~increase in costs and expenses was primarily due to ~~goodwill impairment expense recorded~~increased employee compensation costs in both our APEI Segment and our HCN Segment, including costs related to the voluntary reduction in force program implemented during the three months ended ~~September 30, 2016 in our HCN Segment~~March 31, 2018 and ~~a decrease in loss on disposals of long-lived assets~~additional stock-based compensation related to certain employees reaching retirement eligibility in our APEI ~~Segment~~Segment. These increased costs were partially offset by ~~increases~~decreases in ~~employee compensation~~instructional materials costs, ~~including~~legal costs, ~~related to the retirement of the APUS President,~~bad debt expense and ~~classroom subscription services expense~~advertising costs in our APEI Segment. Costs and expenses as a percentage of revenue ~~decreased~~increased to ~~89.6%~~91.8% for the three months ended ~~September 30, 2017,~~March 31, 2018, from ~~99.5%~~89.0% for the three months ended ~~September 30, 2016.~~March 31, 2017. The ~~decrease~~increase in costs and expenses as a percentage of revenue was primarily due to the ~~goodwill impairment expense recorded~~increase in costs and expenses during ~~the three months ended September 30, 2016 in our HCN Segment and~~ a ~~lower loss on disposals of long-lived assets in our APEI Segment.~~period when consolidated revenue decreased.

Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended ~~September 30, 2017~~March 31, 2018 were ~~$28.7~~$29.7 million, representing an increase of ~~1.3%~~$0.7 million, or 2.5%, from ~~$28.4~~$29.0 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in instructional costs and services expenses was primarily ~~the result of increases~~due to an increase in employee compensation ~~expenses~~costs in our APEI Segment and HCN Segment, ~~and an increase~~including costs related to the voluntary reduction in ~~classroom subscription services expense~~force

Index

program in our APEI Segment, partially offset by decreases in ~~professional fees and~~ instructional materials expense in our APEI Segment. Instructional costs and services expenses as a percentage of revenue ~~were 39.2%~~increased to 39.6% for the three months ended ~~September 30, 2017, compared to 38.4%~~March 31, 2018, from 38.3% for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in instructional costs and services expenses as a percentage of revenue was primarily due to the increase in instructional costs and services expenses during a period when consolidated revenue decreased.

Selling and promotional expenses. Our selling and promotional expenses for the three months ended ~~September 30, 2017~~March 31, 2018 were ~~$14.6~~$15.6 million, representing an increase of ~~11.4%~~$0.1 million, or 0.9%, from ~~$13.1~~$15.4 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase

~~Index~~

in selling and promotional expenses was primarily the result of an increase in employee compensation costs related to the voluntary reduction in force program in our APEI Segment partially offset by decreases in advertising ~~expenses~~costs and marketing support materials expense in our APEI Segment. Selling and promotional expenses as a percentage of revenue increased to ~~20.0%~~20.8% for the three months ended ~~September 30, 2017,~~March 31, 2018, from ~~17.8%~~20.4% for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in selling and promotional expenses as a percentage of revenue was primarily due to the increase in selling and promotional expenses during a period when consolidated revenue decreased.

General and administrative expenses. Our general and administrative expenses for the three months ended ~~September 30, 2017~~March 31, 2018 were ~~$17.2~~$18.9 million, representing an increase of ~~0.7%~~$1.1 million, or 6.4%, from ~~$17.1~~$17.8 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in general and administrative expenses was primarily related to increases in employee compensation costs ~~including costs~~ related to the voluntary reduction in force program and additional stock-based compensation costs for retirement ~~of the APUS President,~~eligible employees in our APEI Segment partially offset by decreases in bad debt expense in our APEI Segment. Bad debt expense for the three months ended ~~September 30, 2017~~March 31, 2018 was ~~$1.2~~$1.1 million, or ~~1.6%~~1.5% of revenue, compared to ~~$1.6~~$1.4 million, or ~~2.2%~~1.9% of revenue in the prior year period. The decrease in bad debt expense was primarily due to changes in student mix, prior changes in admissions and verification processes, and changes in other processes. General and administrative expenses as a percentage of revenue increased to ~~23.5%~~25.2% for the three months ended ~~September 30, 2017,~~March 31, 2018, from ~~23.2%~~23.4% for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in general and administrative expenses as a percentage of revenue was primarily due to the increase in general and administrative expenses during a period when consolidated revenue decreased.

Loss on disposals of long-lived assets. The loss on disposals of long-lived assets for the three months ended ~~September 30, 2017~~March 31, 2018 was ~~$0.4~~$0.1 million as compared to ~~$5.1~~$0.5 million for the three months ended ~~September 30, 2016. The three months ended September 30, 2016 includes a $4.0 million loss on the abandoned development of a new student course registration engine in our APEI Segment.~~

~~Impairment of goodwill.~~ ~~The impairment of goodwill for the three months ended September 30, 2016 of $4.7 million resulted from the reduction of the carrying value of goodwill in our HCN Segment.~~March 31, 2017.

Depreciation and amortization expenses. Depreciation and amortization expenses were ~~$4.7~~$4.5 million and ~~$4.9~~$4.7 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. Depreciation and amortization expenses as a percentage of revenue decreased to ~~6.4%~~6.0% for the three months ended ~~September 30, 2017,~~March 31, 2018, from ~~6.7%~~6.3% for the three months ended ~~September 30, 2016.~~March 31, 2017. The decrease in depreciation and amortization expenses as a percentage of revenue was due to our depreciation and amortization expenses decreasing at a rate greater than our consolidated revenue.

Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were ~~$1.6~~$1.8 million and ~~$1.3~~$1.2 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. Stock-based compensation expense for the three months ended March 31, 2018 includes approximately $1.0 million of accelerated expense for employees who have reached retirement eligibility in our APEI Segment. For additional information regarding our stock-based and other compensation expenses, please refer to “Note 9.8. Stock-Based Compensation” in the Notes to Consolidated Financial Statements in this Quarterly Report.

~~Income tax expense.~~Voluntary Reduction in Force expenses. We recognized income tax expense for the three months ended September 30, 2017 and September 30, 2016 of $3.3 million and $0.1 million, respectively, or effective tax rates of 43.0% and 20.7%, respectively. The increase in our effective tax rate for the three months ended September 30, 2017 is primarily due to changes in the apportionment of state taxes and adjustments related to taxes paid for 2016. TheVoluntary reduction in ~~the effective tax rate for the three months ended September 30, 2016 is related to a change in the apportionment of state taxes and favorable adjustments related to taxes paid for the 2015 tax year.~~

~~Equity investment income.~~ ~~Equity investment income was $0.04 million for the three months ended September 30, 2017 and a loss of $0.02 million for the three months ended September 30, 2016, respectively.~~

~~Net income.~~ Our net income was $4.4 million for the three months ended September 30, 2017, compared to net income of $0.3 million for the three months ended September 30, 2016, an increase of $4.0 million. This increase was related to the factors discussed above.

~~Index~~

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

~~Revenue.~~ Our consolidated revenue for the nine months ended September 30, 2017 was $221.2 million, a decrease of $13.4 million, or 5.7%, compared to $234.5 million for the nine months ended September 30, 2016. The revenue decrease is due to a $15.5 million, or 7.3%, revenue decrease in our APEI Segment, partially offset by a $2.2 million, or 10.1%, revenue increase in our HCN Segment. The APEI Segment revenue decrease was a result of a 6.7% decrease in net course registrations. The HCN revenue increase was primarily a result of an increase in revenue per student related to a change in student mix and other factors.

~~Costs and expenses.~~ Costs and expenses for the nine months ended September 30, 2017 were $198.9 million, a decrease of $8.6 million, or 4.1%, compared to $207.5 million for the nine months ended September 30, 2016. The decrease in costs was primarily related to goodwill impairment expense recorded in our HCN Segment during the third quarter of 2016, a decrease in loss on disposals of long-lived assets and bad debt expense in our APEI Segment partially offset by costs related to the retirement of the former APUS President, increases in legal expenses, employee compensation costs, marketing support materials expense and classroom subscription services expense in our APEI Segment. Costs and expenses as a percentage of revenue increased to 89.9% for the nine months ended September 30, 2017, from 88.5% for the nine months ended September 30, 2016. The increase in costs and expenses as a percentage of revenue was primarily due to our consolidated revenue decreasing at a rate greater than the decrease in our costs and expenses.

~~Instructional costs and services expenses.~~ Our instructional costs and services expenses for the nine months ended September 30, 2017 were $87.5 million, representing an increase of 0.6% from $87.0 million for the nine months ended September 30, 2016. The increase in instructional costs and services expenses was primarily the result of increases in classroom subscription services expense in our APEI Segment and employee compensation costs in our HCN Segment partially offset by decreases in instructional materials expense in our APEI Segment. Instructional costs and services expenses as a percentage of revenue were 39.6% for the nine months ended September 30, 2017, compared to 37.1% for the nine months ended September 30, 2016. The increase in instructional costs and services expenses as a percentage of revenue was due to the increase in instructional costs and services expenses during a period when consolidated revenue decreased.

~~Selling and promotional expenses.~~ Our selling and promotional expenses for the nine months ended September 30, 2017 were $44.1 million, representing a decrease of 1.1% from $44.6 million for the nine months ended September 30, 2016. The decrease in selling and promotional expenses was primarily the result of a decrease in advertising expenses in our APEI Segment partially offset by an increase in marketing support materials in our APEI Segment. Selling and promotional expenses as a percentage of revenue increased to 19.9% for the nine months ended September 30, 2017, from 19.0% for the nine months ended September 30, 2016. The increase in selling and promotional expenses as a percentage of revenue was due to our consolidated revenue decreasing at a rate greater than the decrease in our selling and promotional expenses.

~~General and administrative expenses.~~ Our general and administrative expenses for the nine months ended September 30, 2017 were $51.6 million, representing an increase of 1.8% from $50.7 million for the nine months ended September 30, 2016. The increase in general and administrative expenses was primarily related to an increase in legal expenses, costs incurred in connection with the retirement of the former APUS President, and increases in professional fees in our APEI Segment partially offset by decreases in bad debt expense and financial aid processing fees in our APEI Segment. Bad debt expense for the nine months ended September 30, 2017 was $3.5 million, or 1.6% of revenue, compared to $5.5 million, or 2.4% of revenue in the prior year period. General and administrative expenses as a percentage of revenue increased to 23.3% for the nine months ended September 30, 2017, from 21.7% for the nine months ended September 30, 2016. The increase in general and administrative expenses as a percentage of revenue was due to the increase in general and administrative expenses during a period when consolidated revenue decreased.

~~Loss on disposals of long-lived assets.~~ The loss on disposals of long-lived assets for the nine months ended September 30, 2017 was $1.6 million as compared to $5.9 million for the nine months ended September 30, 2016. The nine months ended September 30, 2016 includes a $4.0 million loss on the abandoned development of a new student course registration engine in our APEI Segment.

~~Impairment of goodwill.~~ ~~The impairment of goodwill for the nine months ended September 30, 2016 of $4.7 million resulted from the reduction of the carrying value of goodwill in our HCN Segment.~~

~~Depreciation and amortization expenses.~~ Depreciation and amortization expenses were $14.2 million and $14.6 million for the nine months ended September 30, 2017 and 2016, respectively. Depreciation and amortization expenses as a percentage of revenue increased to 6.4% for the nine months ended September 30, 2017, from 6.2% for the nine months ended September 30,

~~Index~~

2016. The increase in depreciation and amortization expenses as a percentage of revenue was due to consolidated revenue decreasing at a rate greater than the decrease in depreciation and amortization expense.

~~Stock-based compensation expenses.~~ ~~Stock-based compensation~~force expenses included in instructional costs and services, selling and promotional, and general and administrative expenses ~~was $4.3 million and $4.0~~were $1.7 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2018. There were no voluntary reduction in force expenses during the three months ended March 31, 2017.

Income tax expense. We recognized income tax expense for the three months ended March 31, 2018 and March 31, 2017 of $1.9 million and ~~2016,~~$3.8 million, respectively, or effective tax rates of 28.9% and 46.1%, respectively. The decrease in our effective tax rate for the three months ended March 31, 2018 is primarily due to the reduction in the federal corporate tax rate to 21% from the prior existing maximum rate of 35% effective January 1, 2018 under the U.S. Tax Cuts and Jobs Act, or Tax Act, partially offset by additional income tax expense of approximately $0.2 million related to ASU 2016-09 Compensation - Stock Compensation (Topic 718). We anticipate that our effective tax rate prior to discrete tax benefits, may range from approximately 27% to 29% for 2018. The effective tax rate for the three months ended March 31, 2017 includes approximately $0.5 million in additional income tax expense due to ASU 2016-09. For additional information regarding our ~~stock-based and other compensation expenses,~~income tax expense, please refer to “Note ~~9. Stock-Based Compensation”~~7. Income Taxes” in the Notes to Consolidated Financial Statements in this Quarterly Report.

~~Income tax expense.~~Equity investment (loss)/income. ~~We recognized income tax expense~~Equity investment loss was $0.2 million for the nine months ended September 30, 2017 and September 30, 2016 of $9.7 million and $10.5 million, respectively, or effective tax rates of 43.2% and 37.9%, respectively. The increase in our effective tax rate for the nine months ended September 30, 2017 is due to the implementation of ASU 2016-09, ~~Compensation - Stock Compensation (Topic 718)~~ which resulted in $0.5 million in additional income tax expense, changes in state tax apportionment, and adjustments related to taxes paid for 2016. Under ASU 2016-09, excess tax benefits and tax deficiencies associated with stock based compensation must be recognized in the income statement and in operating activities on the statements of cash flow. Previously, the excess tax benefits and tax deficiencies were recorded in additional paid-in capital under stockholders’ equity on the balance sheet and under financing activities on the statements of cash flow. Because expiring stock options with an option price greater than the current stock price expired during the three months ended March 31, ~~2017, the reversal~~2018 compared to income of ~~the tax benefit that was reported when the stock options were issued is now recorded in the income statement.~~

~~Equity investment income.~~ ~~Equity investment income was $0.1 million and $0.7~~$0.04 million for the ~~nine~~three months ended ~~September 30, 2017 and September 30, 2016, respectively. Equity~~March 31, 2017. The investment ~~income~~loss for the ~~nine~~three months

Index

ended ~~September 30, 2016 includes $0.7~~March 31, 2018 was due to an impairment on our investment in RallyPoint of $0.5 million ~~in income related to~~partially offset by our share of earnings from ~~NWHW Holdings, Inc.’s favorable adjustment of its deferred tax asset valuation allowance.~~other investments.

Net income. Our net income was ~~$12.7~~$4.6 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, compared to net income of ~~$17.3~~$4.5 million for the ~~nine~~three months ended ~~September 30, 2016, a decrease~~March 31, 2017, an increase of ~~$4.6 million, or 26.4%.~~$0.1 million. This ~~decrease~~increase was related to the factors discussed above.

Analysis of Operating Results by Reportable Segment

The following table provides details on our operating results by reportable segment for the respective periods (unaudited):

~~Index~~



	Three Months Ended March 31,
	2018		2017
	(In thousands)
Revenue:
American Public Education Segment	$	65,668	$	68,129
Hondros College of Nursing Segment	9,299		7,559
Total Revenue	$	74,967	$	75,688
Income from operations before interest income and income taxes:
American Public Education Segment	$	5,130	$	7,927
Hondros College of Nursing Segment	1,032		380
Total Income from operations before interest income and income taxes	$	6,162	$	8,307

APEI Segment

For the three months ended ~~September 30, 2017,~~March 31, 2018, the ~~$2.2~~$2.5 million decrease to approximately ~~$64.9~~$65.7 million in revenue in our APEI Segment was primarily attributable to lower net course registrations. Net course registrations at APUS decreased ~~4.3%~~4.0% to approximately ~~81,000~~83,300 during the three months ended ~~September 30, 2017~~March 31, 2018 compared to the same period in ~~2016.~~2017. We believe that the decrease in APUS’s net course registrations for the three months ended ~~September 30, 2017~~March 31, 2018 was primarily attributable to challenges associated with competition for students and challenges in the military market, the continuing effects of prior periods of decreased registrations, and ongoing declines in new student net course registrations resulting in decreased returning student net course registrations. Income from operations before interest income and income taxes in our APEI Segment was ~~$6.9~~$5.1 million during the three months ended ~~September 30, 2017, an increase~~March 31, 2018, a decrease of ~~21.1%~~35.3% compared to the same period of ~~2016,~~2017, primarily as a result of ~~a reduction in losses on disposals of long-lived assets.~~

~~For~~ the ~~nine months ended September 30, 2017, the $15.5 million~~ decrease ~~to approximately $197.3 million~~ in revenue ~~in our APEI Segment was primarily attributable to~~resulting from lower net course ~~registrations. Net course~~ registrations ~~at APUS decreased 6.7% to approximately 244,700~~and increases in costs and expenses during the ~~nine~~three months ended September 30, 2017, compared to the same period in 2016. We believe that the decrease in APUS’s net course registrations for the nine months ended September 30, 2017 was primarily attributable to challengesMarch 31, 2018, including expenses associated with ~~competition for students and challenges in~~ the military market, the continuing effects of prior periods of decreased registrations, and ongoing declines in new student net course registrations resulting in decreased returning student net course registrations. Income from operations before interest income and income taxes in our APEI Segment was $20.4 million during the nine months ended September 30, 2017, a decrease of 34.5% compared to the same period of 2016, primarily as a result of decreased revenue partially offset by avoluntary reduction in ~~losses on disposals of long-lived assets.~~force.

HCN Segment

For the three months ended ~~September 30, 2017,~~March 31, 2018, the $1.7 million increase to approximately ~~$8.4~~$9.3 million in revenue in our HCN Segment was primarily attributable to an increase in student enrollment. HCN student enrollment increased ~~11.2%~~19.3% to approximately ~~1,800~~2,040 students during the three months ended ~~September 30, 2017~~March 31, 2018 compared to the same period in ~~2016.~~2017. Income from operations before interest income and income taxes in our HCN Segment was ~~$0.7~~$1.0 million during the three months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~a loss from operations of $5.3~~$0.4 million ~~compared to~~in the same period of ~~2016. The increase was primarily~~2017 as a result of ~~goodwill impairment expense of $4.7 million recognized~~an increase in revenue from higher enrollments during the three months ended ~~September 30, 2016.~~

For the nine months ended September 30, 2017, the $2.2 million increase to approximately $23.8 million in revenue in our HCN Segment was primarily attributable to an increase in revenue per student related to a change in student mix and other factors. HCN student enrollment remained unchanged during the nine months ended September 30, 2017 as compared to the same period in 2016. Income from operations before interest income and income taxes in our HCN Segment was $1.8 million during the nine months ended September 30, 2017, compared to a loss of $4.2 million during the same period of 2016, primarily a result of goodwill impairment expense of $4.7 million recognized during the three months ended September 30, 2016.March 31, 2018.

Liquidity and Capital Resources

Liquidity

We financed operating activities and capital expenditures during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017 ~~and September 30, 2016~~ with cash provided by operating income. Cash and cash equivalents were ~~$166.3~~$186.2 million and ~~$146.4~~$179.2 million at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively, representing an increase of ~~$19.8~~$6.9 million, or ~~13.5%~~3.8%. Cash and cash equivalents at ~~September 30, 2017~~March 31, 2018 increased by ~~$28.6~~$38.4 million from ~~$137.7~~$147.8 million, or ~~20.7%~~26.0%, as compared to ~~September 30, 2016.~~March 31, 2017.

Index

We derive a significant portion of our revenue from tuition assistance programs from the DoD. Generally, these funds are received within 60 days of the start of the courses to which they relate. Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course. These factors, together with the number of courses starting each month, affect our operating cash flow.

We expect to continue to fund our costs and expenses through cash generated from operations. Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide

~~Index~~

adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. Capital expenditures could be higher in the future as a result of, among other things, expenditures for technology or other business capabilities, the opening of new campuses at HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth. We expect that we will continue to make expenditures to invest in strategic opportunities and to enhance our business capabilities. We will continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies. We may need additional capital in connection with any change in our current level of operations, including if we were to pursue significant business acquisitions or investment opportunities, or determine to make other significant investments in our business.

Operating Activities

Net cash provided by operating activities was ~~$29.3~~$10.2 million and ~~$42.7~~$5.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, ~~and September 30, 2016,~~ respectively. The ~~decrease~~increase in cash from operating activities was primarily due to ~~lower~~timing of estimated tax payments, higher net income and other changes in working capital due to the timing of payments and receipts. For the three months ended March 31, 2018 the Company made no estimated tax payments compared to $6.1 million of aggregate estimated tax payments during the three months ended March 31, 2017. The Company expects to make estimated tax payments in the aggregate amount of $5.5 million during the second quarter of 2018 related to tax extensions and first quarter estimates. In connection with the voluntary reduction in force, the Company expects to pay approximately $1.7 million in employee severance costs during the second quarter of 2018.

Investing Activities

Net cash used in investing activities was ~~$8.0~~$1.7 million and ~~$9.1~~$2.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, ~~and September 30, 2016,~~ respectively. This decrease was primarily related to decreased capital expenditures and ~~equity investments partially offset by increased~~ capitalized program development costs.

Financing Activities

Net cash used in financing activities was ~~$1.3~~$1.6 million and ~~$1.6~~$1.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, ~~and September 30, 2016,~~ respectively. The ~~decrease~~increase in cash used in financing activities for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 was primarily related to ~~a reduction~~increased cash used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in ~~excess tax benefit due to~~connection with the ~~accounting change for stock based compensation.~~vesting of restricted grants. For additional information on our repurchases of our common stock, please refer to “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II of our Annual Report and “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Repurchases” of Part II of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Contractual Commitments

There were no material changes to our contractual commitments outside of the ordinary course of our business during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Index

We are subject to the impact of interest rate changes and may be subject to changes in the market values of future investments. We invest our excess cash in bank overnight deposits. We had no material derivative financial instruments or derivative commodity instruments as of ~~September 30, 2017~~.

Market Risk

We had no material derivative financial instruments or derivative commodity instruments as of ~~September 30, 2017.~~March 31, 2018. We maintain our cash and cash equivalents in bank deposit accounts, ~~which may~~money market funds and short-term U.S. treasury bills. The bank deposits exceed federally insured limits. We have historically not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on cash and cash equivalents. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material ~~effect~~impact on the fair market value of our portfolio.

~~Index~~

Interest Rate Risk

We are subject to risk from ~~adverse~~ changes in interest rates primarily relating to our ~~investing~~investment of ~~excess~~ funds in ~~cash equivalents bearing variable interest rates, which are tied~~short-term U.S. treasury bills issued at a discount to ~~various market indices.~~their par value. Our future investment income will vary due to changes in interest rates. At ~~September 30, 2017~~March 31, 2018, a 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash ~~flows related to investments in cash equivalents.~~flows.

There has been no material change to our market risk or interest rate ~~sensitivity~~risk during the three months ended ~~September 30, 2017~~March 31, 2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of ~~September 30, 2017~~March 31, 2018. Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of ~~September 30, 2017~~March 31, 2018.

Changes in Internal Control over Financial Reporting

Beginning January 1, 2018, we implemented ASC 606, Revenue from Contracts with Customers. Although the new revenue standard is expected to have an immaterial impact on our ongoing revenue and net income, we implemented changes to our processes related to revenue recognition and the related control activities. These included the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract review requirements, and gathering information provided for disclosures.

There ~~was~~were no ~~change~~other changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

~~On August~~See Item 3 ~~2017, the Company received from the Attorney General~~ of ~~the Commonwealth~~Part I of ~~Massachusetts a Civil Investigative Demand, or CID, dated July 31, 2017, relating~~our Annual Report. See also Note 10, “Commitments and Contingencies,” to ~~an investigation of alleged unfair or deceptive acts or practices by AMU~~our Consolidated Financial Statements included elsewhere in connection with the recruitment and retention of students and the financing of education. The CID requires the production of documents and information relating to recruitment, enrollment, job placement and other matters. The Company continues to cooperate with the Attorney General’s office and cannot predict the eventual scope, duration or outcome of the investigation at this time, including whether any potential loss, or range of potential losses, is probable or reasonably estimable. Furthermore, the Company cannot predict what affect, if any, the investigative demand will haveQuarterly Report on ~~its financial position or results of operations.~~Form 10-Q.”

Item 1A. Risk Factors

An investment in our stock involves a high degree of risk. You should carefully consider the risks set forth in the Risk Factors section of our ~~Annual Report on Form 10-K for the year ended December 31, 2016, or the~~ Annual Report and all of the other information set forth in this Quarterly Report on Form 10-Q, our Annual Report, and the additional information in the other reports we file with the ~~Securities and Exchange Commission.~~SEC. If any of the risks contained in those reports actually occur, our business, results of operation, financial condition and liquidity could be harmed, the value of our securities could decline and you could lose all or part of your investment. With the exception of the following, there have been no material changes in the risk factors set forth in the Risk Factors section of our Annual ~~Report, as supplemented~~Report.

If our institutions fail to maintain their institutional accreditation, they would lose the ability to participate in DoD tuition assistance programs and Title IV programs.

Index

Accreditation by an accrediting agency that is recognized by the ~~Risk Factors~~Secretary of Education is required for participation in DoD tuition assistance programs and for an institution to become and remain eligible to participate in Title IV programs. APUS participates in DoD tuition assistance programs and Title IV programs, and HCN participates in Title IV programs. As described more fully in each operating segment’s section in “Our Institutions - Accreditation” and “Regulatory Environment - Accreditation” in our Annual Report, APUS is accredited by HLC, an institutional accrediting agency recognized by the Secretary of Education, and HCN is accredited by ACICS, an institutional accrediting agency that until December 2016 was recognized by the Secretary of Education. By decision dated December 12, 2016 the Secretary of ED withdrew and terminated ED’s recognition of ACICS. On December 15, 2016, ACICS filed a motion for a temporary restraining order and preliminary injunction against ED in the United States District Court for the District of Columbia. On March 23, 2018, the United States District Court for the District of Columbia issued a Memorandum Opinion that remanded the December 2016 decision to the Secretary of ED for further proceedings. On April 4, 2018, the Secretary of ED issued a letter explaining that as a result of the remand, there is currently no final decision on the recognition petition that ACICS submitted to the Department in January 2016, and accordingly, ACICS’s status as a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in that status until the Secretary of ED issues a final decision on ACICS’s recognition petition. We cannot predict what action the Secretary will take on ACICS’s recognition petition.

HCN continues to seek additional accreditation from the Accrediting Bureau of Health Education Schools, or ABHES, a national accreditor for allied health schools that is recognized by ED. On February 6, 2018, ABHES notified HCN that at its January 2018 meeting, ABHES acted to defer action on HCN’s application for initial accreditation until ABHES’s May 2018 meeting. On March 30, 2018, HCN submitted to ABHES additional information in connection with ABHES’s consideration of HCN’s application.

Our institutions’ accrediting agencies may impose restrictions on their accreditation or may terminate their accreditation. To remain accredited, our institutions must continuously meet certain criteria and standards relating to, among other things, performance, governance, institutional integrity, educational quality, faculty, administrative capability, resources, and financial stability. Our institutions also must comply with accrediting agency policies and requirements, such as to apply and wait for approval before making certain changes. For example, in connection with our organizational realignment, HLC requested that APUS submit an application to enable HLC to determine whether APUS’s proposal to enter into a shared services model with APEI constitutes a change in organization or structure that requires HLC’s prior approval. APUS asked HLC to consider the change in structure application at the HLC Board of Trustees’ June 2018 meeting, subject to submission of updates to the application, and the HLC Board of Trustees was tentatively scheduled to consider the application at that meeting. However, on April 26, 2018, HLC notified APUS that consideration of the application would be postponed to HLC’s November 2018 meeting. In its February 7, 2018 letter to APUS imposing a governmental investigation designation, HLC notified APUS that it will continue to review APUS’s change in structure application while that designation remains active; however, HLC may defer action on the application while the investigation is pending. HLC has indicated that it will review findings related to the designation, if any, when they occur and will determine whether such findings impact the change in structure application at that time. For more information about the current status of the change of structure application, see “Regulatory Environment - Accreditation” in Part I, Item 1 of our ~~Quarterly Report~~Annual Report.

ACICS requires accredited institutions to submit annually certain campus-level and program-level data for purposes of monitoring student achievement against established requirements, and a campus or program that fails to satisfy the requirements may be subject to various actions up to withdrawal of accreditation or may be required to cease enrollment in the program. Failure to meet any of these criteria or standards or to comply with these policies and requirements could result in the loss of accreditation at the discretion of the accrediting agencies. The complete loss of accreditation would, among other things, render our institutions and their students ineligible to participate in DoD tuition assistance programs and Title IV programs, and have a material adverse effect on ~~Form 10-Q~~our enrollments, revenue, and results of operations.

If the accrediting agency of one of our institutions was to lose its ability to serve as an accrediting agency for Title IV program purposes and the institution was unable to obtain recognition from another recognized accrediting agency, that institution would lose its ability to participate in Title IV programs and DoD tuition assistance programs.

APUS is accredited by HLC. In June 2015, the National Advisory Committee on Institutional Quality and Integrity, or NACIQI, the panel charged with advising ED on whether to recognize accrediting agencies for Title IV purposes, voted to recommend that ED renew HLC’s recognition as an accrediting agency through December 2017. ED subsequently accepted NACIQI’s recommendation and scheduled HLC for consideration during NACIQI’s February 2018 meeting. At the February 2018 meeting, NACIQI voted to recommend that ED renew HLC’s recognition for five years. If HLC were to lose its recognition as an accrediting agency and APUS was unable to obtain recognition from another recognized accrediting agency, APUS would lose its eligibility to participate in Title IV programs and DoD tuition assistance programs. The inability of APUS

Index

to participate in Title IV programs would have a material adverse effect on enrollments, revenue, and results of operations.

HCN is accredited by ACICS. By decision dated December 12, 2016 the Secretary of ED withdrew and terminated ED’s recognition of ACICS. On December 15, 2016, ACICS filed a motion for a temporary restraining order and preliminary injunction against ED in the U.S. District Court for the ~~quarterly period~~District of Columbia. On March 23, 2018, the United States District Court for the District of Columbia issued a Memorandum Opinion that remanded the December 2016 decision to the Secretary of ED for further proceedings. On April 4, 2018, the Secretary of ED issued a letter explaining that as a result of the remand, there is currently no final decision on the recognition petition that ACICS submitted to the Department in January 2016, and accordingly, ACICS’s status as a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in that status until the Secretary of ED issues a final decision on ACICS’s recognition petition. We cannot predict what action the Secretary of ED will take on ACICS’s recognition petition. The ineligibility of HCN to participate in Title IV programs would have a material adverse effect on HCN’s enrollments and on our revenue, results of operations, and financial condition.

Our institutions will be subject to sanctions that could be material to our results and damage our reputation if the Department of Education determines that our institutions failed to correctly calculate and timely return Title IV program funds for students who withdraw before completing their educational program.

An institution participating in Title IV programs must correctly calculate the amount of unearned Title IV program funds that have been disbursed to students who withdraw from their educational programs before completion, and must return those unearned funds to the Title IV programs in a timely manner, generally within 45 days after the date the school determines that the student has withdrawn. Under ED regulations, late returns of Title IV program funds for 5% or more of students sampled in connection with the institution’s annual Title IV compliance audit constitute material noncompliance for which an institution generally must submit an irrevocable letter of credit.

APUS’s Title IV compliance audit for the year ended December 31, 2016 identified a finding related to return of Title IV funds calculations that were not properly computed. In a Final Audit Determination letter dated January 29, 2018, ED conveyed its finding that funds had not been returned timely. Under ED regulations, if the institution’s annual Title IV compliance audit for either of its two most recently completed fiscal years finds that Title IV funds were not returned timely for 5% or more of students sampled in the audit, the institution generally must submit an irrevocable letter of credit. ED also noted that a similar finding had been made in an open program review with respect to which APUS has not yet received a program review report. In connection with the finding, ED indicated that APUS must post an irrevocable letter of credit equal to 25% of the total amount of Title IV program funds that should have been returned during calendar year 2016, which results in a requirement for a letter of credit of approximately $700,000. On February 15, 2018, APUS requested that ED reconsider its finding that APUS had made untimely returns and the related requirement to submit a letter of credit. On March ~~31, 2017.~~27, 2018, ED responded confirming the requirement for a letter of credit, and on March 28, 2018, the Company posted the required letter of credit.

Participation in the tuition assistance programs of the DoD requires compliance with numerous regulations, with which the failure to comply could lead to a loss of an ability to participate in these programs or other adverse events.

In order to participate in the DoD tuition assistance programs, institutions must, among other things, comply with a Memorandum of Understanding, or MOU, that specifies terms and conditions of participation in DoD tuition assistance programs. By signing the MOU, APUS agreed to participate in DoD’s Third Party Education Assessment. In January 2017, DoD announced that its Third Party Education Assessment will take the form of a new Voluntary Education Institutional Compliance Program, or ICP, which ~~will replace~~replaces the former process, the Military Voluntary Education Review. The ICP ~~will utilize~~utilizes a sampling approach to regularly review ~~regularly~~ the 2,700 educational institutions that participate in the DoD tuition assistance

~~Index~~

programs. Each year, DoD will select randomly 200 institutions and use a risk-based model to select 50 additional institutions. The risk-based model will take into account several data elements, including: rate of course completion; total verified complaints; changes in enrollment of students receiving tuition assistance; ratio of graduation rate relative to cost per course; changes in graduation rate; and total number of enrollment transactions processed. The ICP will be an iterative process with three stages. After each stage, DoD will narrow the list of institutions subject for heightened review in the following stage. DoD will share the findings from each stage with other government agencies and regulators. An institution that is selected and has no issues will be exempt from random selection for three years and from risk-based selection for one year. By signing the MOU, APUS also agreed to participate in the ICP when requested. APUS was notified on May 8, 2017 that it iswas included in the first set of 250 institutions selected to participate in the ICP. On May 29, 2017, APUS submitted a self-assessment as part of the first stage of the ~~ICP,~~ICP. On February 9, 2018, DoD issued an Iteration 1 Report for APUS that made two findings. With respect to recruiting, marketing, and ~~has not received~~advertising, DoD found some instances where attire worn by an individual providing testimonials on the institution’s public-facing website could be construed as similar to a ~~response. Within six months~~distinctive part of military uniform. With respect to financial matters, DoD found a lack of information relating to the financial aid process, including the lack of a timeline for applying for financial aid. APUS must develop a corrective action plan to address each of the findings within 30 days after receipt of ~~any assessment report findings, institutions~~the Iteration 1 Report and must resolve the findings and provide information to DoD about corrective actions ~~taken. In instances when~~taken within six months after receipt of the Iteration 1 Report. If the resolution cannot be completed within six months, ~~the institution~~APUS must submit a status report every three months until the finding is resolved. APUS submitted a corrective action plan to DoD on March 15, 2018. An educational institution that demonstrates an unwillingness to resolve a finding may be subject to a range of penalties from a written warning to revocation of the MOU and termination of the institution’s participation in the DoD tuition assistance programs. If we are no

Index

longer able to receive funds from DoD tuition assistance programs, or if those programs are reduced, eliminated, or temporarily suspended, our enrollments and revenue could be significantly reduced, which would result in a material adverse effect on our results of operations and financial condition.

~~If ACICS loses its ability to serve as an accrediting agency for Title IV program purposes and HCN is unable~~The inability of our institutions’ graduates to obtain ~~recognition from another recognized accrediting agency, HCN would lose its ability to participate~~professional licensure, employment or other outcomes in ~~Title IV programs and DoD tuition assistance programs.~~

~~By decision dated December 12, 2016 the Secretary~~their chosen fields of ED withdrew and terminated ED’s recognition of ACICS, which accredits HCN. As described below, ACICS has appealed the Secretary’s decision in the U.S. District Court for the District of Columbia. When the Secretary withdraws the recognition of an accrediting agency, a postsecondary educational institution may be allowed to continue its participation on a provisional basis in the Title IV programs for a period not to exceed 18 months from the date of the Secretary’s decision to allow the institution to seek accreditation from another recognized accrediting agency. During this period of provisional participation, ED will deem an ACICS-accredited institution to hold recognized accreditation, and ED will require the institution to comply with additional conditions. ED will also impose certain additional requirements on ACICS-accredited institutions that do not meet certain milestones toward accreditation by another recognized accrediting agency. On December 21, 2016, HCN and ED executed a revised PPPA and addendum to the PPPA in which HCN agreed to comply with ED’s conditions and requirements. HCN has an in-process application for accreditation by ABHES, an accrediting agency that is recognized by ED.

On December 15, 2016, ACICS filed a motion for a temporary restraining order and preliminary injunction against ED in the U.S. District Court for the District of Columbia. ACICS asked the court to stay the Secretary’s decision terminating ACICS’s recognition status, restore ACICS’s recognition status, and enjoin ED from enforcing the requirements for ACICS-accredited institutions, including those set forth in ED’s PPPA. On December 20, 2016, the court denied ACICS’s request for a temporary restraining order, and on February 21, 2017, the court denied ACICS’s request for a preliminary injunction. On March 31, 2017, ACICS filed a motion for summary judgment seeking to vacate the Secretary’s decision terminating ACICS’s recognition status and requesting that the court return ACICS’s petition for continued recognition to ED for reconsideration. On April 28, 2017, ED filed a cross-motion for summary judgment. Briefing on the motions was completed as of May 26, 2017, and the court may schedule a hearing to assist in its consideration of the motions. If the court does not restore ACICS’s recognition status, HCN would not be eligible to participate in Title IV programs beyond June 12, 2018, unless HCN becomes accredited by another accrediting agency recognized by ED within that period. In addition, the approval status and in some cases funding provided by other agenciesstudy could ~~be adversely affected by the loss of accreditation by ACICS. On October 4, 2017, ACICS announced that it had submitted to ED a formal petition for recognition as a national accreditor.~~

~~The ineligibility of HCN to participate in Title IV programs would have a material adverse effect on HCN’s~~reduce our enrollments and ~~on our~~ revenue, ~~results of operations, and financial condition.~~

ACICS adopted a more rigorous policy on student achievement measures, which resulted in the PN Program at the HCN Cleveland campus receiving a Program-Level Show-Cause Directive on March 9, 2017 that was later vacated, the HCN Cleveland campus receiving a Compliance Warning on April 10, 2017, the Cleveland and Dayton campuses receiving a Reporting status on April 26, 2017, and the ADN Program at the HCN Cleveland campus receiving a Compliance Warning on April 27, 2017.

Beginning in 2012, ACICS, HCN’s accreditor, established requirements, including minimum “standards” and expected “benchmarks,” to measure student retention, graduate placement and licensure exam passage rates. To satisfy ACICS’s

~~Index~~

standards, the retention rate, placement rate, and licensure exam pass rate each must exceed 60%. To satisfy ACICS’s benchmarks, each rate must exceed 70%. If ACICS determines that an institution’s campus-level or program-level data does not satisfy one or more standards or benchmarks, ACICS may take certain actions. In January 2017, ACICS published a new policy, effective December 6, 2016, that defines in terms of metric ranges when a particular action will be taken at the campus and program levels, including placement on reporting status, issuance of a compliance warning, issuance of a Show-Cause Directive, or issuance of an adverse action.

For the reporting year July 1, 2015 through June 30, 2016, several HCN campuses and programs did not satisfy ACICS student achievement measures. On March 9, 2017, HCN received a program-level Show-Cause Directive for the PN Program at the Cleveland campus. ACICS took such action under the new policy because the placement rates initially reported for the PN Program at the Cleveland campus were between 50 - 59.9% for two consecutive years. Subsequently, on March 21, 2017, ACICS notified HCN that ACICS had granted HCN’s request to supplement the data that was used to calculate certain HCN placement rates, including the 2016 placement rate for the PN Program at the Cleveland campus that in part resulted in the Show-Cause Directive. On May 5, 2017, ACICS notified HCN that based on inclusion of the additional data, the 2016 placement rate for the PN Program at the Cleveland campus was 60%, which satisfies the ACICS “standard” but does not satisfy the ACICS “benchmark.” As a result, ACICS vacated the program-level Show-Cause Directive. We are unable to determine whether ACICS will take other action, such as placing HCN on a program-level Reporting status for the PN Program at the Cleveland campus. If a Reporting status is imposed, HCN may be required to develop and implement an Improvement Plan that includes specific activities that have been implemented to improve the programs that are impacting the program-level placement rate.

HCN received a notice from ACICS on April 10, 2017 that ACICS had issued a campus-level Compliance Warning for the Cleveland campus. ACICS took such action under the new policy because the campus-level placement rate for the Cleveland campus, which is calculated based on placements for the PN Program and the ADN Program, was between 50 - 59.9% for one year in 2016. The campus-level placement rate utilized to issue the Compliance Warning included the supplemental data discussed above. In response to the Compliance Warning, HCN was required to submit certain information to ACICS by June 1, 2017, including: an Improvement Plan that includes specific activities that have been implemented to improve the programs that are impacting campus-level placement rates; and additional placement rate information for the period July 1, 2016 to March 31, 2017. HCN submitted the required information to ACICS on June 1, 2017.

ACICS notified HCN on April 26, 2017 that ACICS had placed the Cleveland and Dayton campuses on campus-level Reporting status. ACICS took such action under the new policy because the campus-level retention rate for each of the Cleveland and Dayton campuses was between 60 - 69.9% for one year in 2016. In response to being placed on Reporting status, HCN is required, with respect to each of the Cleveland and Dayton campuses, to implement an Improvement Plan that includes specific activities being considered for purposes of positively impacting campus-level retention rates. HCN staff for each campus may also be required to attend ACICS’s Student Achievement Workshop/Webinar.

HCN received a notice from ACICS on April 27, 2017 that ACICS had issued a program-level Compliance Warning for the ADN Program at the Cleveland campus. ACICS took such action under the new policy because, taking into account the supplemental data discussed above, the program-level placement rate for the ADN Program at the Cleveland campus was between 50 - 59.9% for one year in 2016. In response to the Compliance Warning, HCN is required to develop an Improvement Plan that includes specific activities being considered and in progress for purposes of positively impacting the program-level placement rate.

If any of the HCN campuses or programs, whether addressed above or otherwise, fails to satisfy ACICS achievement measures, enrollment in such HCN campuses or programs could decline, or we could be forced to cease enrollments at those campuses or in those programs, which could have a material adverse impact on HCN’s student enrollment, revenue, and cash flows. The actions HCN is taking to improve its student achievement measures may not be successful in resolving existing issues or may fail to prevent additional issues arising with respect to other campuses or programs.

By decision dated December 12, 2016, the Secretary of ED withdrew and terminated ED’s recognition of ACICS, as discussed more fully above in this section and in our Annual Report. HCN has an in-process application for accreditation by the Accrediting Bureau of Health Education Schools, or ABHES, a national accreditor for allied health schools that is recognized by ED for federal student financial aid purposes. ABHES policies require that institutions and programs applying for ABHES accreditation must advise ABHES immediately of any adverse or potentially adverse action, including a Show-Cause Directive, by another accrediting agency. HCN timely notified ABHES of the ACICS Show-Cause Directive, HCN’s response, and when the Show-Cause Directive was vacated. ABHES also reserves the right not to grant initial accreditation if an institution is on probation or an equivalent status imposed by another accrediting agency. At this time, we cannot predict how ABHES will

~~Index~~

respond to ACICS’s actions described above, including how they will impact any decision with respect to initial accreditation of HCN or any of HCN’s programs or campuses as part of that initial accreditation decision.

The Ohio State Board of Career Colleges and Schools, or Ohio State Board, has initiated formal disciplinary action against HCN’s Cincinnati campus based on allegations related to changes to the PN Program curriculum. If the Ohio State Board finds that HCN violated the Ohio State Board’s requirements, it could limit ~~suspend, or revoke a certificate of registration or program authorization or impose a civil penalty.~~

In August 2017, HCN received notice from the Ohio State Board of Career Colleges and Schools that the Ohio State Board was initiating formal disciplinary action against HCN’s Cincinnati campus because the campus discontinued offering one version of the PN Program curriculum allegedly without the Ohio State Board’s permission and implemented a new PN Program curriculum. It was alleged that at least three students enrolled in the discontinued curriculum were unable to complete without transferring into the new program and incurring substantial costs and time to complete the program. As permitted, on August 10, 2017, HCN requested a hearing before the Ohio State Board with respect to the notification and HCN is cooperating with the Ohio State Board on the matter. If the Ohio State Board finds that HCN violated the Ohio State Board’s requirements, it could limit, suspend, revoke or refuse to issue or renew a certificate of registration or program authorization or may impose a civil penalty of not more than $3,500 for each violation.

The Ohio Board of Board of Nursing, or the OBN, has placed HCN’s ADN Program on provisional approval because the ADN Program has not met the OBN pass rate standard for four consecutive years, which could have an adverse effect on our enrollments or eventually on our ability to ~~continue the program.~~offer educational programs, and potentially lead to litigation that could be costly to us.

To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing education program that is approved by the Ohio Board of Nursing, or the OBN. Regulations of the OBN, which approve the Diploma in Practical Nursing, or the PN Program, and the Associate Degree in Nursing, or the ADN Program, require that nursing education programs such as HCN’s PN and ADN Programs have a pass rate on the relevant National Council Licensure Examination, or NCLEX, that is at least 95% of the national average for first-time candidates in a calendar year. If a program does not attain ~~such~~this pass rate, the program may face various consequences. On March 8, 2017, the OBN placed HCN’s ADN Program on provisional approval because the ADN Program has not met the OBN pass rate standard for four consecutive ~~years, which we believe has been negatively affected by the pass rates at HCN’s Cleveland campus over the last several~~ years. The OBN will consider restoring a program to Full Approval status after a program is placed on provisional status due to low NCLEX scores if the program attains a pass rate that meets or exceeds 95% of the national average for first-time candidates for at least two consecutive years. If a program on provisional approval fails to meet and maintain the requirements of the OBN at the end of the time period established for provisional approval, the OBN may propose to continue provisional approval for a set time period or may propose to withdraw approval pursuant to an adjudication proceeding. On March 8, 2018 OBN released a final report of the ADN Program’s performance for calendar year 2017, which found that HCN’s ADN Program did not meet the OBN pass rate standard in 2017. HCN has been implementing changes, including the curriculum changes discussed in our Annual Report, that are designed to improve NCLEX scores over time but there is no assurance that these changes will be successful. This situation could have an adverse impact on our ability to enroll students and eventually our ability to continue ~~the program,~~HCN’s ADN Program, any of which would have an adverse effect on our results of operations, cash flows, and financial condition.

If the Massachusetts Attorney General finds that we did not comply with Massachusetts state law or regulations, we may be required to pay significant financial penalties and/or modify or curtail our operations.

On August 3, 2017, we received from the Attorney General of the Commonwealth of Massachusetts a Civil Investigative Demand, or CID, dated July 31, 2017, relating to an investigation of alleged unfair or deceptive acts or practices by AMU in connection with the recruitment and retention of students and the financing of education. The CID requires the production of documents and information relating to recruitment, enrollment, job placement and other matters. We continue to cooperate with the Attorney General’s office and cannot predict the eventual scope, duration, or outcome of the investigation at this time. At the conclusion of the investigation, we may be subject to claims of failure to comply with Massachusetts state law or regulations and may be required to pay significant financial penalties and/or modify or curtail our operations. Other state attorneys general may also initiate inquiries into APEI or its subsidiaries. Based on information available to us at present, we cannot reasonably estimate a range of potential impact this inquiry might have on our financial conditions or results of operations, if any, because it is uncertain what remedies the Attorney General might ultimately seek in connection with the inquiry, if any. See the risk factor entitled “Investigations by state Attorneys General, Congress, and governmental agencies may result in increased regulatory burdens and costs” in Item 1A of Part I of our Annual Report for additional information on risks associated with investigations.

~~Index~~

~~We have announced an organizational realignment, and challenges encountered due to the realignment may cause strategic or operational challenges and adversely impact us.~~

On July 1, 2016, Dr. Powell, the then-current provost of APUS, assumed the Presidency of APUS in anticipation of an organizational realignment. Dr. Wallace E. Boston, who had been serving as the President of APUS and the CEO of APEI, remained in his position as CEO of APEI, providing strategic and leadership support to APUS, HCN, and other APEI ventures. During 2016, we invested capital and human resources in the transition and planned realignment, as well as in changes to our systems and training of employees, among other things. HLC, as the institutional accreditor for APUS, requested that APUS submit an application to enable HLC to determine whether APUS’s proposal to enter into a shared-services model with APEI constitutes a change in organization or structure that requires HLC’s prior approval. On December 22, 2016, APUS submitted the requested change of structure application.

HLC is currently reviewing APUS’s application and as part of the review process conducted an on-site visit to APUS in early May 2017. On June 26, 2017, HLC notified APUS that HLC has delayed completing and issuing a report of its on-site visit because HLC staff believes that HLC’s Criteria for Accreditation and related policies do not provide an explicit frame of reference for how the Criteria for Accreditation should be applied to a shared-services model between an accredited institution and a related entity. On July 7, 2017, HLC notified APUS that at its June 29, 2017 meeting the HLC Board of Trustees authorized the commencement of a process to develop a framework for applying the Criteria of Accreditation to such shared-services models through HLC’s Change of Control, Structure or Organization process. HLC indicated that members of the HLC Board of Trustees and HLC staff would present a proposed framework to the full HLC Board of Trustees for its consideration at its November 2017 meeting. HLC indicated that APUS will have an opportunity to update its application after a framework is approved, and HLC staff will issue its report after reviewing any such updates. HLC had planned to visit APUS in February 2017 as part of a standard mid-cycle review. However, as a result of the change-of-structure application process, HLC postponed that mid-cycle review until the third quarter of 2018.

We believe that the earliest that the HLC Board of Trustees would make a determination on the change of structure application is February 2018. We are unable to predict whether HLC will approve APUS’s change of structure application and whether such approval will be subject to limitations or conditions. If HLC does not approve the realignment, imposes limitations or conditions on the realignment, takes longer than expected to take action with respect to the realignment, or otherwise sanctions APUS, we could incur increased costs, fail to realize the efficiencies that we expect and incur additional strategic or operational challenges.

~~Effective October 15, 2017, Dr. Powell retired from her role as President of APUS. Dr. Boston was appointed Interim President of APUS until a permanent replacement is appointed.~~

As with any leadership or operational change, each of the implementation of the planned realignment and the search and appointment of a new President for APUS could lead to strategic and operational challenges, distractions of management from other key initiatives, inefficiencies or increased costs, any of which could adversely affect our business, financial condition, results of operations and cash flows.

Index

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases

During the period ended ~~September 30, 2017~~March 31, 2018, we did not repurchase any shares of our common stock other than shares that were deemed to have been repurchased to satisfy employee minimum tax withholding requirements in connection with the vesting of restricted stock grants. The table and footnotes below provide details regarding our repurchase programs (unaudited):

Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3)
July 1, 2017 - July 31, 2017 —
$ —
—
615,368
$ 148,008
August 1, 2017 - August 31, 2017 —
—
—
615,368
148,008
September 1, 2017 - September 30, 2017 —
—
—
615,368
148,008
Total —
$ —
—
615,368
$ 148,008



	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3)
January 1, 2018	—	$	—	—	780,725	$	148,008
January 1, 2018 - January 31, 2018	—	—		—	1,044,116	148,008
February 1, 2018 - February 28, 2018	—	—		—	1,044,116	148,008
March 1, 2018 - March 31, 2018	—	—		—	1,044,116	148,008
Total	—	$	—	—	1,044,116	$	148,008

(1)

On December 9, 2011, ~~our~~the Company’s Board of Directors approved a stock repurchase program for ~~our~~its common stock, under which wethe Company may annually purchase up to the cumulative number of shares issued or deemed issued in that year under ~~our~~the Company’s equity incentive and stock purchase plans. Repurchases may be made from time to time in the open market at prevailing market prices or in privately negotiated transactions based on business and market conditions. The stock repurchase program does not obligate us to repurchase any shares, may be suspended or discontinued at any time, and ~~will be~~is funded using ~~our~~the Company’s available cash.

(2)

On May 14, 2012, ~~our~~the Company’s Board of Directors authorized a program to repurchase up to $20 million of shares of ~~our~~the Company’s common stock. On each of March 14, 2013, June 13, 2014, and June 12, 2015 ~~our~~the Company’s Board of Directors increased the authorization by an additional $15 million of shares, for a cumulative increase of $45 million of shares and a total ~~cumulative~~ authorization of $65 million of shares. Subject to market conditions, applicable legal requirements and other factors, the repurchases may be made from time to time in the open market or privately negotiated transactions. The authorization does not obligate usthe Company to acquire any shares, and purchases may be commenced or suspended at any time based on market conditions and other factors as ~~we deem~~the Company deems appropriate.

(3)

During the ~~nine~~three month period ended ~~September 30, 2017,~~March 31, 2018, we were deemed to have repurchased ~~59,310~~61,215 shares of common stock forfeited by employees to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants. These repurchases were not part of the stock repurchase program authorized by our Board of Directors as described in footnotes 1 and 2 to this table.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Index

Item 6. Exhibits



Exhibit No.	Exhibit Description

~~10.1+~~	~~Letter Agreement dated September 28, 2017, by and among American Public Education, Inc., American Public University System, Inc. and Karan H. Powell (1)~~
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-101.INS **	XBRL Instance Document
EX-101.SCH **	XBRL Taxonomy Extension Schema Document
EX-101.CAL **	XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.DEF **	XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB **	XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE **	XBRL Taxonomy Extension Presentation Linkbase Document

+	~~Management contract or compensatory plan or arrangement~~
~~(1)~~	~~Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the Commission on September 29, 2017.~~

Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		AMERICAN PUBLIC EDUCATION, INC.
	/s/ Dr. Wallace E. Boston	~~November 7, 2017~~May 8, 2018
	Dr. Wallace E. Boston
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ Richard W. Sunderland, Jr.	~~November 7, 2017~~May 8, 2018
	Richard W. Sunderland, Jr.
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

3633




	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1417
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2826
Item 4. Controls and Procedures	2927


PART II – OTHER INFORMATION


Item 1. Legal Proceedings	2927
Item 1A. Risk Factors	2927
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3431
Item 3. Defaults Upon Senior Securities	3431
Item 4. Mine Safety Disclosures	3431
Item 5. Other Information	3431
Item 6. Exhibits	3532

SIGNATURES	3633